(Bloomberg) -- At 80 years old, the self-proclaimed father of the ultra-discount airline model is still swinging for the fences, stealing the spotlight at this year’s Dubai Air Show with the biggest order ever placed for Airbus SE commercial aircraft.
William Augustus Franke, co-founder and managing partner of private equity firm Indigo Partners, joined Airbus on Wednesday in announcing the deal for 430 aircraft, which came with a price tag of almost $50 billion. The transaction will fuel growth in Franke’s bare-bones airline empire, where he has spent the last part of his career avoiding what he calls “the path to hell” for an airline: creeping costs.
“We’re firm believers in the ultra-low-cost model,” Franke told reporters in Dubai. “At the end of the day, in a competitive environment, the lower the cost, the lower the fares, is a winning strategy.”
The Airbus planes Indigo ordered will be distributed among four carriers that sell customers deeply discounted tickets for an airline seat, and little else. Deliveries of the planes will start in 2021 to the carriers: Frontier Airlines in the U.S., Mexico’s Volaris, East European operator Wizz Air Holdings Plc and Chile’s JetSmart, which began operating this year.
Unlike the volatile history of full-service carriers, Franke said he’s had a “remarkable run” with the airlines in Indigo’s investment portfolio. “Our airlines are all very profitable, they all produce cash.”
The large order will support growth at the four airlines, with discount carriers often expanding at a faster pace than larger rivals, said George Ferguson, a Bloomberg Intelligence analyst. It would take a brisk 20 percent annual growth rate for Frontier to make use of its existing 68 Airbus orders, plus the 134 it would get from the deal announced Wednesday, by around 2024, he said. The numbers refer to incremental growth, not replacing older planes already in the fleet.
“I look at Wizz and Frontier and I think they’re not letting up here” in terms of growth, Ferguson said. “If he doesn’t grow as fast as he expects, he could go to Airbus and defer some growth” by delaying aircraft deliveries.
Franke used his credibility in the industry and his track record of developing successful ultra discounters to craft the order, and he probably received large discounts on the price, said Samuel Engel of aviation consultant ICF.
Texas to Paraguay
Franke co-founded airline investor Indigo Partners in Arizona in 2002 after leaving his job as chief executive officer of America West Holdings Corp. the year before. Indigo now has about $8 billion under management, according to Franke.
The airline investor was born in Bryan, Texas, and moved to South America as a young boy because of his father’s job with the U.S. State Department. He grew up in Paraguay, Argentina and Brazil, where he graduated high school.
Franke made a pact with two close high school friends that they’d all attend the same U.S. university, and the trio flipped a coin to determine if it would be Stanford or Yale, Franke told students in a 2012 speech at the Northern Arizona University business school named for him. He obtained his bachelor’s degree from Stanford and went on to graduate from law school at the age of 22, before serving in the U.S. Army.
He was chairman of convenience store chain Circle K in 1992 when he was tapped by Arizona Governor Fife Symington to take control of America West, despite Franke’s lack of experience in the industry. He raised $15 million in financing to help save the bankrupt carrier. Franke added chief executive to the chairman’s title in 1993 and led the airline out of Chapter 11 in 1994.
Franke groomed Doug Parker, then 39, as his successor at America West after hiring Parker as chief financial officer. Together, the pair crafted a program to help improve the struggling airline’s on-time and financial performance. Parker currently is CEO of American Airlines Group Inc., the world’s largest carrier.
Franke stepped firmly into the discount world in 2004 when he was named chairman of Tiger Airways in Singapore, a position he held five years. He also was an investor in Ireland’s Ryanair before it became publicly traded.
The airline executive developed an iron discipline over the years in keeping costs from creeping upward. It’s just human nature when you’re enjoying success to let businesses and expenses expand, Franke observed at the press conference Wednesday.
‘Path to Hell’
“Sometimes we see that happen with large airlines who have significant market positions as a low-cost carrier, and decide to do things like add clubs or add frequent-flier programs, or improve the service and offerings on board,” he said. “All of that creates a path to hell.”
He helped push the transformation of Spirit Airlines Inc. into an ultra-discounter before stepping down as non-executive chairman there in 2013, when Indigo sold off its 17 percent stake in the Miramar, Florida-based carrier. The move allowed Franke’s firm to purchase Frontier out of bankruptcy and convert it to an ultra-discounter. He’s now chairman of Frontier, which earlier this year delayed an initial public sale of shares.
It took months to finalize the latest purchase agreement with Airbus, Franke said. Some of the planes will go into the four airlines, but Franke could use others to support a new discount carrier, said ICF consultant Engel. Another option would be to resell some of the aircraft to a bank or lessor and then lease them back, allowing the airline to reinvest the premium over the original purchase price, he said.
Indigo believes the low-cost model “has growth opportunities that are untapped in the U.S.,” Engel said. “They are no longer fringe players like Spirit used to be. They’ve proven the model.”
The mega deal also helps seal the legacy of Airbus sales chief John Leahy, 67, who will retire in coming months. The order is valued based on the list prices for the planes, although airlines typically receive discounts for large orders.
“Their objective is to sell aircraft at the best possible price,” Franke told reporters in Dubai. “Our objective is to buy aircraft at the best possible price. I’ve known Mr. Leahy for 25 years. Sometimes he wins, sometimes I win.”
Who won this time? “That’s a good question,” he said with a smile.
©2017 Bloomberg L.P.