Indigo Partners’ Bill Franke Talks About His Airline Investments

Hours before accepting Aviation Week’s Laureate for Lifetime Achievement, Bill Franke—one the most influential figures of the U.S. airline industry in the last three decades and with no small impact internationally—sat down in Washington with Senior Air Transport Editor Christine Boynton, CAPA – Centre for Aviation Senior Analyst Lori Ranson and Executive Editor for Commercial Aviation Jens Flottau to talk about the industry and his projects. Franke turned around America West in the 1990s and subsequently built his private equity firm Indigo Partners, which invested in key low-cost carriers including Frontier Airlines, Wizz Air, Volaris and JetSmart. Many industry CEOs—Robert Isom (American Airlines), Doug Parker (formerly American) and Scott Kirby (United Airlines)—went through his school. Now, at 88, Franke is still working full-time and exploring new investment ideas.

You recently changed the CEO at Frontier. What happened? 

I had no specific issue with [former Frontier CEO] Barry [Biffle]. He’d been there 13 years, and we all tend to get comfortable with our environment after some period of time. He basically said that it was probably time for him to think about moving on, and I said, “I think it is.” Jimmy [Dempsey] had been [chief financial officer], and now he’s CEO. He is a very bright guy.

Do you still think of Frontier as an ultra-low-cost carrier (ULCC), or is it moving away from that? 

At Spirit [Airlines], we put in what we called the big front seat, and this is just an extension of that idea, because a lot of people are willing to pay for some more comfort. And so that’s the path for Frontier. But a traditional first class—that’s not going to happen.

Do you think other ULCCs will emulate what Frontier is doing? 

I don’t know. It’s a subject of a lot of discussion. Some don’t want to deviate at all from the original model. Some are willing to follow the JetBlue model, and so it’s kind of a mixed bag. I am willing to take a look at it, but in stages; I want to see how that markets when we put the equivalent big front seat in Frontier aircraft, and we’ll see.

For a long time, you were very strict about sticking to the model and not allowing deviations like this. What made you change your mind a little bit about that?

The issues that Spirit faced as it tried to get to that model made me stop and look at it. And that was the time when we were having discussions about a possible combination [with Frontier] several months ago, and so we did some market research. The thought is, you’d attract revenue to the airplane by offering some degree of traditional airline seating. We’ll take it one at a time. We own airlines in other jurisdictions where we haven’t made those changes. Wizz Air is a good example in Europe, and in the case of JetSmart or Volaris, we haven’t made any significant changes to the model. When we first started Wizz Air, the Central Eastern European consumers drove or took a train to get from Budapest to London, and they were very cost-conscious. That was the focus. We were offering fares that were 25-30% lower than at traditional airlines, and we developed quite a following. Will airlines across all geographies move toward greater comfort in the aircraft? Yeah, probably over time, but the consumer has to drive it.

You mentioned you looked at buying Spirit. What kept you from doing so?

I thought that we would integrate Spirit into Frontier. But there’s just too much brain damage. You have to be very thoughtful about it.

How do you continually assess whether Spirit may become an attractive opportunity for you again?

My approach to that has been that it has to make economic sense, and that economic sense has to include some evaluation of the risk involved in that investment. It’s not just how many shares you get; it’s what the potential for those shares is in an environment where there’s consolidation of two airlines, and I’m reasonably cautious about that. As you look at the potential Spirit-Frontier combination, two things [are important]: No. 1, Spirit had been acquired by investors who are not airline investors. They had expectations of a transaction which we wouldn’t meet, and turns out, apparently, nobody’s met, and so they’re going to do a stand-alone [business]. I know Dave Davis, who’s the CEO. He’s a good guy, but how much independence will he have? That’s something we don’t know at this point in time. And some of the directors that were appointed by the controlling creditors have a mixed history.

How so?

Maybe you were the CEO of an airline that failed. I don’t know. Could be something like that.

What’s your assessment on what Southwest has done in the last year, once Elliott Investment Management got involved and now that they’re pushing through changes? Do you think they’ve done too much?

They made a lot of changes here recently, and the consumer is uncertain about whether they like or don’t like it. That has to play out a while. Herb [Kelleher] was a close, personal friend. I was a young guy. He took me under his wing. He would have, in the marketplace, killed me if he could. But on a personal level, he was just the best friend ever. I think Southwest misses his overarching, bigger vision and strategy. Southwest has more recently been very traditional in its decision-making.

Do you see an airline like JetBlue as a stand-alone entity, operating kind of a hybrid model and moving upscale, like most airlines?

The consumer likes the JetBlue model. I know people who fly to Europe, and they like the model. Is the airline properly prepared to offer the model? Have they done all they can to make sure they’re flying the right markets? Those are other issues, but in terms of consumer reaction, it’s a very popular airline. I know people who don’t fly anything else.

Do you think there’s a place for JetBlue at its current size?

It probably has to either get bigger or be integrated. But so far, they haven’t been inclined to accept that view.

Would you be interested in investing in JetBlue?

They have talked to us over the years on a couple of occasions. It’s a legitimate question, but I’m not in a position to respond because I’m underinformed. I don’t know what they are paying for their airplanes. I don’t know how they are managing the crew and so forth. In the airline business, there’s a lot of devil in the details. In concept? Maybe.

The Biden administration started to scrutinize how much credit card revenues changed the competitive dynamics. They were doing a few hearings, and then that process seems to have stalled. Do you think that needs to be picked up again?

If you can tell me the views of the Trump administration on any particular issue, I would be very appreciative. I’m probably not as well informed, but at the end of the day, the decisions that are made are sometimes based on politics that we’re not involved with or with historic perspectives that we don’t agree with. And so I think we at Indigo will be quite open but quite cautious in decisions. [The Trump administration calls] me on a regular basis. They tried to get me to go do things, and I have declined because I have a full-time job.

Two of the airlines that Indigo Partners invested in are in Latin America—Volaris and JetSmart. Have things played out as expected?

In a lot of the markets in Latin America, the competition has been with traditional airlines. We’ve done remarkably well in attracting consumers in Argentina, Chile, Peru and Colombia to the airline by having a traditional low-cost service model. Will that change as the consumer becomes more educated and more focused on something other than what time they get there? Probably, but that’s not going to happen anytime soon.

How is JetSmart positioning itself now? You have the two big groups, LATAM and Abra, which are growing pretty rapidly and are acquiring airlines.

We have had opportunities to combine with some of the more integrated, larger holding companies. We declined to do that. And for now, I think that’s the right judgment. We have actually done well. Load factors are high, and it’s a cash producer, profitable. And we are probably looking toward a listing sometime over the next 18 months. The bankers all want to do it today, right? But you have to be thoughtful; it has to make business sense. It’s a good management team.

Why is now a good time to combine Viva and Volaris in Mexico, and do you think it will get regulatory approval easily?

The management team at Volaris has spent a fair amount of time in the U.S., and they spent a lot of time with us. And so far, they have been able to work with, for example, U.S. regulators, or with regulators within the region. I have to say candidly: Brazil is different. If you want to make a big entry in Brazil, there are a lot of politics. I graduated from high school in Brazil, and I still have a lot of friends and family in Brazil. But [Brazil] thinks it’s a big boy, right?

So no JetSmart Brazil anytime soon?

We fly from Argentina to Rio and farther north, and we’re pretty careful about it.

Do you think that Indigo is well covered in the Americas with your current portfolio? Do you see any white space?

The major issue would be whether we think [we should enter] Brazil. The politics, you and I couldn’t drink enough whiskey to survive the politics.

How do you view the barriers to entry in Latin America and taxation? Do you see any recent progress being made?

We have made some progress with Central America and the Mexicans. For years, they had different views of life, and the Central Americans lived in fear of the Mexicans deciding which part of Central America they wanted. Well, that is now moderated, and the politics are sorted out. Volaris flies in and out of Central America, no problem. They do say things like “we want so many airplanes” or “we want you to fly on certain days,” stuff like that. But it’s all manageable. That will happen in South America. Argentina is an issue if you’re flying to certain places. Chile and Argentina have a long history, and you have to be very thoughtful of that. But for example, one of the most profitable routes, and frequently the most profitable route for JetSmart, is Buenos Aires, [Argentina,] to Asuncion, [Paraguay].

Why did you reduce your stake in Wizz Air? 

We had two large institutional shareholders—one high-profile Asian investor and one European. And we had run past the 10 years where we have control of an investor’s ability to exit. We were in the 15th year, and both of them had institutional reasons why they wanted to reduce their exposure. So we accommodated them. And by the way, they both are still shareholders. They just reduced their exposure, and probably because of some of the other issues in the portfolio, they were looking for a gain. Even though Wizz has dropped in share value, it was still over two times or maybe almost three times what they’d invested.

When you look at the recent changes at Wizz—adding operations in Abu Dhabi and then ending them, placing a very large Airbus A321XLR order, then reducing it substantially—in hindsight, did the airline drive the model too far? Was it too risky? 

I want to be thoughtful here, but it could be that some of us didn’t agree with a lot of those decisions, and certainly some of the investors didn’t agree with those decisions. If you’re an Asian investor, for example, you’d be really curious why you’d want to expand your exposure to the Middle East. József Váradi has been running Wizz for years, and he’s damn good, but at the end of the day, he’s also susceptible to growth expectations, and in the case of the Middle East, they were very willing to negotiate nonstandard arrangements in order to get Wizz to move into Abu Dhabi. I personally was not in favor of it, but I didn’t stand in the way of it, and it turned out to be probably a step too far. Váradi and the management team arrived at that conclusion and have shut down that operation.

And the decision to order a large number of A321XLRs? 

I’m Airbus’ biggest customer over time. The XLR has a place, but it’s not every place. I just couldn’t see how Wizz was going to take that many XLRs and make a case for them. I did what I could to resist that order, and it turns out, they’ve now reduced that order by a significant amount. There could be a place for it if Wizz were flying to the U.S., and there’s a lot of chatter in the market about maybe Wizz is going to do that. I want to underscore: Maybe they’re going to do that. And that airplane would be the right airplane for a flight from Budapest to New York or wherever. But it’s not the right airplane to fly from Budapest to London.

So the airlines under Indigo Partners have some level of autonomy to make decisions? 

Wizz is a public company, and we, Indigo, have three directors on the board, so we are a minority in terms of board votes. Now, we could have had a big blowup—throw a hand grenade in the room and demand a shareholder meeting—but is that in anybody’s best interest, long term? No, the right thing is to make the decision up front so that you get everybody on the same page. And in the case of the Wizz decisions, everybody wasn’t on the same page, but a majority supported management’s objectives.

Do you feel like the airlines are in a better position to deal with a war like the one in Iran than they would have been in the past? 

I hadn’t thought about that. That’s actually an interesting question. Oil prices have spiked, and airlines have had to push up revenue in order to deal with that, but the consumer has stepped up. I think we were all fairly shocked.

Because consumers accepted higher fares and are still traveling? I

f you think about the consumer and the world and the politics, you would think they might be staying at home and hiding money in the cookie jar, right? But the consumer spending in terms of revenue at the airline level is pretty strong right now.

If this drags on longer, do you see this driving industry consolidation? 

That’s quite a question—a crystal ball question.

What is your view on fuel hedging? None of the large U.S. airlines are protected, and now fuel prices have doubled because of the Iran war. 

I’m actually a fan of hedging, but almost all of my CEOs are not. We have, on a periodic basis, required the airlines to hedge.

Southwest ended hedging last year. In the U.S., would you think it’s gone for good? I

 don’t know. When I was CEO of America West, I didn’t want the risk associated with jet fuel prices, so we had a very intricate hedging program that we worked out with a number of investment banks, and it was very successful in terms of protecting the airline’s cost structure. Did it add expense to the jet fuel? Yeah, it did. But at the end of the day, that expense was outweighed by market risk. Today, for the average CEO, hedging is an expensive option and complicated, and they’re worried about guessing wrong.

Does it make sense for more airlines to start looking into doing something similar to what Delta Air Lines did in purchasing its own refinery? 

I don’t know. I just wish we all had Delta’s balance sheet.

We’re all wondering whether the war in Iran could be the cause for a permanent shift, weakening the Big Three Gulf carriers and strengthening the Europeans and the Asians, because traffic flows are different now. 

I think that’s a very legitimate issue. I don’t have informed views yet, but just look at what’s happening. I wouldn’t want to be in Qatar or the United Arab Emirates. They’ve already had significant issues around flights. It is probably too soon to have an answer, but you guys should stay on top of that.

We would also like to ask you about aircraft. Would the XLR be an option for JetSmart, your Chilean low-cost carrier? 

I think we are fine with the A320 and the A321 for longer flying, but not with the XLR. I can see that at some point in time, when they’re more established. I could see flights from, say, Peru or Colombia to the U.S. But right now, we are not focused on that. We are focused on trying to build the networks in the region and become the airline of choice, and we are focused on getting the airline to the public market at the right point in time.

Does the current situation affect the timing of that? 

Sure, yeah. It’s a very, very legitimate problem, because you’re selling tickets at a local currency. You’re flying airplanes that are either in euros or dollars. They’re paying for jet fuel in dollars. Your flight crew wants to be compensated on a basis that’s consistent with flight crews in similar positions.

What about smaller aircraft such as the [Airbus] A220 or the Embraer E2? 

I don’t see that happening—not on my watch, anyway. That creates an entirely different operational requirement, maintenance, different airplanes, and I just don’t think we want that complication right now.

Do you think that Airbus should launch the A220-500, the stretched version of the A220? 

I don’t want to comment on that. You might expect that [Airbus] would ask me that, right?

The A220-500 could be the interim step between the A320neo and the Next-Generation Single-Aisle (NGSA). What is the right time for the NGSA? Are you pushing for it? 

Those are questions that are complicated and have different potential answers, so this is probably not the right time for me to answer those questions.

In your airline portfolio, you have carriers in Latin America, the U.S. and Europe. But not so much in Asia. 

Don’t forget Cebu Pacific in Manila [in the Philippines]. It’s a totally different model there. I mean, it flies literally millions of Filipinos to markets in the Middle East and elsewhere, and it has widebody aircraft.

Do you see more opportunities there? 

Probably. When you say Asia, does that include China?

Well, that’s a tough one, isn’t it? Would it even be doable for Indigo Partners to enter China? 

The Chinese are trying to think through what they want the industry to look like. For a long time, every province had its own airline, but they have begun to agglomerate the industry. But they really want to have exposure to the balance of Asia and, mark my words, eventually the U.S. But that’s a big ticket.

When you look back on your legacy, how does that feel? 

I know this sounds strange to you, but I never think about it. Because it’s going to be whatever it’s going to be, right? You’re making daily decisions, and you’re making strategic decisions that will have some impact, I suppose, on your legacy. But you don’t make the decisions or not make the decisions because of that impact. That’s just not what I do. You can hope that we’re doing stuff that is rational, not stuff that makes Bill look good.

When you make those decisions, what’s your golden rule? 

I have some really bright people who work for me, and we make decisions on an integrative basis. That is to say that we all sit like this and talk about X, Y and Z and try to arrive at a point of view. Over 20 years, we have lost this many people: zero. It’s not a one-man show.

What has driven you to be a part of this industry for so long? 

I’m intellectually curious, and I like challenges, so I think those two things drove me. I’ve run a Fortune 500 forest products company. I’ve run a retailer. I ran the largest bank in a four-state area. What’s the commonality of all that? It is the fact that they all had issues, and they all needed common sense and proper decision-making, timely decision-making, and I’ve enjoyed it.