Straddling Airplanes: The Thing To Do When Flying At 30,000 Feet…

The Air Transport Association, a U.S. airline trade group, said it expected industry profits to total $4 billion this year. This is a stark improvement over the modest operating profits of last year.

Some even think the industry could top its former record of about $5.4 billion in profit, set in 1999.

Those profit projections, and a recent decline in airline shares along with the broader stock market, has some analysts recommending airline stocks as inexpensive and likely to rally as profits pile up.

So lets jump on in, the water is warm…

Frontier Airlines (NASDAQ: FRNT) is the next hot topic in the airline industry. Currently in its tenth year of operations, the Denver-based airline is the second largest jet service carrier at Denver International Airport with a fleet of 46 aircraft and employing approximately 4,500 aviation professionals.

Frontier operates routes linking their Denver hub to 43 destinations in 24 states spanning the nation from coast-to-coast and to five cities in Mexico.

Its maintenance and engineering department has received the Federal Aviation Administration’s highest award, the Diamond Certificate of Excellence, in recognition of 100 percent of its maintenance and engineering employees completing advanced aircraft maintenance training programs, for five consecutive years.

Frontier also ranked as one of the “Top 10 Domestic Airlines” as determined by the readers of Travel & Leisure magazine.

So why is the stock at $5 and not $50?

Well like the rest of the industry, Frontier has been smacked with high fuel costs and ticket price competition that has hit the bottom line for many airlines.

However, there is a twist in the story. Frontier has just brought on a new CEO, Sean Menke.

In an interview with The Associated Press, Menke said his top priority is returning Frontier to profitability. 

“What I bring is really what I’ve been doing over the last couple of years at Air Canada and that’s being able to see the world from sort of a different perspective,” he said.

One idea is an a la carte fare strategy in which consumers choose to pay more for some services — much like building on a basic automobile with extras — such as seat assignments, multiple bags to be checked and frequent flier options.

“There’s a balance between nickel and diming the consumer and putting a product and a service together that you can ask the appropriate dollars for,” Menke said. “At the end of the day, it really is up to the consumer to choose the product and services that they want.”

Frontier, which has built a successful operation by serving Mexican resorts, also could broaden its international routes and diversify further beyond its hub at Denver International Airport where it competes against major airlines such as United and Southwest.

This change in management will bring a breath of fresh air into the fledgling company. Menke is the right guy for the job since has a ton of experience in almost every aspect of the airline industry.

He has worked at a number of carriers including United Airlines and America West Airlines before joining Frontier in 1999.

Menke was responsible for areas such as maintenance, customer service, planning and flight operations, and is the executive who helped launch Frontier’s successful marketing campaign of animals on aircraft tails that also appear in company commercials.

He was chief operating officer when he resigned in June 2005 to join Air Canada as an executive vice president overseeing commercial strategy where he helped develop the a la carte brand strategy.

If Frontier Airlines is going to turn things around – the time is now. With a new, well-respected CEO and the 3rd quarter earnings bump from the summer vacation season; Frontier has every opportunity to make a break for high profits.

Action to take: Buy one Frontier February 2008 5 Calls (CBOE: FUOBA) at $1.50 for every one Frontier Debary 2008 5 Puts (CBOE: FUONA) at $0.50.

Cheers,

Mitchell Sachs
Senior Equity Analyst, Wall Street Elite