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Southwest: If You Can't Beat 'Em, Buy 'Em

Stocks in this article: LUV FRNT

DENVER ( TheStreet) -- Southwest's (LUV) bid to buy out bankrupt Frontier (FRNT) in Denver may be viewed as a sign of its failure in the market.

By nearly every measure, Southwest has underperformed in Denver. Among the big three Denver airlines, which also include hub carrier United (UAUA), Southwest has been last in load factor, last in average fares and last in available seat mile, in every month, without exception, since it re-entered the market in 2006 after a 20-year absence.

"Southwest is losing money in Denver," says Denver-based aviation consultant Mike Boyd. "Last summer, they put out more red than Sherwin Williams.

"When Southwest came to Denver, Frontier stood and fought," Boyd says. "Frontier is a hometown team, they have a better product and people in Denver are enamored with them. They gave Southwest a bloody nose and a lot of heartburn." But Frontier also sought bankruptcy protection in April 2008.

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Southwest last week submitted a bid worth at least $113.6 million for Frontier, besting a $108.8 million bid by Republic Airways (RJET). Although Southwest could not outperform Frontier, "this is a tactical move to take out a competitor," Boyd says.

The court's deadline for a binding proposal is Aug. 10, followed by an auction within a week. "It is unlikely that anyone can outbid Southwest, with its strong liquidity and balance sheet," said FTN Equity Capital analyst Mike Derchin, in a recent report.

Denver is Southwest's seventh biggest station, with 113 daily departures to 34 cities. In market share, United is first with 34%, Frontier is second with 21% and third-place Southwest has 14%.

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