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Frontier Lands in Bankruptcy

The Denver-based airline's move is intended to prevent credit card processor First Data from holding back payment.
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Updated from 1:36 p.m. EDTFrontierundefined filed suddenly for bankruptcy protection Friday, a move intended to forestall a credit card processor's effort to boost its withholding of ticket revenues.

The Denver-based carrier said the filing followed "an unexpected attempt" by

First Data

, its principal credit card processor, "to substantially increase a 'holdback' of customer receipts, which threatened to severely impact Frontier's liquidity."

The case was filed in a New York bankruptcy court. In a prepared statement, CEO Sean Menke noted that "the automatic stay provision of the bankruptcy code prohibits the credit card processor from increasing its holdback, and we are prepared to litigate this issue if necessary."

Frontier said it did not expect disruptions in service or operations, as it planned to continue all flights, provide ticket refunds and exchanges as usual, and to pay all employees and vendors. However, interest payments on debt instruments have been suspended.

Menke said Frontier has sufficient cash to meet its operating needs and will have sufficient time to obtain additional financing.

The airline's shares plummeted as much as 76.4% Friday. More recently, shares were down $1.08 to 49 cents. Shares opened trading this week at $2.15. Frontier said the stock could be delisted by


if the company fails to meet exchange standards, but it would continue to trade. However, shares in a bankrupt company are normally canceled when the bankruptcy concludes.

In recent weeks, three privately held carriers --






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-- have sought bankruptcy protection and ceased operating, largely as a result of rising fuel prices and, in ATA's case, of the loss of a critical contract with the Defense Department. Frontier's case is different.

In a letter to employees, Menke wrote: "This week, I was notified by our credit card processor that, as of Friday, April 11, due to 'current economic conditions, the rise in fuel costs and the other bankruptcies around the industry,' they intended to start withholding 50% of the credit card funds received from the sale of Frontier tickets.

"If they went ahead and did this, tens of millions of dollars owed to us by our customers would have been withheld by the credit card processor, First Data. I want to emphasize to each of you that this was very sudden and unexpected. We are the victims of a credit market that is very fragile and the tolerance for risk is extremely low. "

Denver-based First Data is wholly owned by affiliates of private equity firm

Kohlberg Kravis Roberts

. First Data was traded publicly from 1992 until last year, when it announced a merger agreement with KKR.

"The terms of our agreement with Frontier Airlines are not unique; they are considered standard industry practice and terms originally agreed upon by Frontier," First Data said Friday, in a prepared statement. "We have been in ongoing dialogue with Frontier Airlines for several months and will continue to work with them in as constructive a manner as possible."

Frontier has approximately 6,000 employees, including 5,000 in Denver. It operates an all-Airbus fleet of 62 aircraft, including 49 A319s, while subsidiary Lynx Aviation operates 10 Q400s. The carrier serves about 12 million passengers annually, most from its Denver hub.

While Frontier shares were falling, shares of its key competitors in Denver were mixed.



was rising 1.5%.



was down 1.6%.

In a report issued Friday, JPMorgan Chase analyst Jamie Baker wrote that "Chapter 11 is by definition an accounting event, not an operational event. While shares in

United and

Southwest may briefly respond positively to the Frontier news, Frontier continues operating."

Baker noted that Frontier's long-term viability depends on a single market, Denver, and said that "may ultimately prove challenging." JPMorgan makes a market in Frontier shares.

Meanwhile, Avondale Partners analyst Bob McAdoo said Frontier shares "will likely continue to trade during the bankruptcy, even though there is no way to be certain that they will not be canceled," he said. "They will likely trade off immediately and then move modestly up or down based on the news flow during the proceedings." Avondale Partners makes a market in Frontier ADRs.

Continued Nasdaq listing requires that a company meet various standards, including market capitalization, minimum bid price and number of market makers. Even if the bid price falls below $1, the deficiency must continue for a sustained period before delisting occurs.