Carrier applies for Sept. 11 loan

Fairbanks airline seeks big money, big moves

Posted: Thursday, February 28, 2002

Frontier Flying Service Inc. is asking for a $10 million federal loan to help it recover from the effects of the Sept. 11 terrorist attacks.

The 52-year-old Fairbanks-based company is only the third airline in the nation to apply for the government's $10 billion loan bailout offered to airlines to help with losses attributed to the East Coast attacks. In its loan application to the federal government, the company said its cargo and passenger operations saw a dramatic drop in activity following the terrorist attacks.

Bob Hajdukovich, director of operations for Frontier Flying Service, said the decreased operations coupled with increased insurance costs prompted the company to apply for the loan.

Hajdukovich emphasized that the company, established in 1950, is not seeking bankruptcy protection, nor are any of the airline's 185 employees facing layoffs because of the jetliner attacks.

"We are a viable company,'' he said. "We're not going out of business.

"We felt like we met the criteria for the program and applied for it," said Hajdukovich, who also serves as president of the Alaska Air Carriers Association.

Should Frontier Flying Service secure the federal loan it applied for in late January, the company would use the money to, among other things, purchase a fleet of five Beech 1900-series aircraft it has been leasing for the past three years. It is also considering adding a sixth aircraft, which would enable the company to begin service in the Kenai-Anchorage market. (See related story, this page.)

"We want the financing package to purchase the aircraft we already have," Hajdukovich said.

Insurance premiums have increased since the terrorist attacks, Hajdukovich said, adding that if the company were to purchase the fleet of airplanes instead of leasing them, the airline would be able to negotiate better insurance rates.

Frontier Flying Service is required to carry the additional insurance coverage by its lessor, he said.

"We are required to have higher coverage than other carriers our size," Hajdukovich said.

"The purchase by Frontier of this fleet of aircraft will assure Frontier will continue to serve its markets for transportation needs, mail delivery, food, medicine and other life necessities,'' the company said in its loan application. "And it allows Frontier to negotiate reasonable insurance at reasonable rates at acceptable limits."

The Air Transportation Safety and System Stabilization Act passed by Congress in November offered $5 billion in direct aid to airlines to cover losses incurred after Sept. 11, plus $10 billion in loan guarantees.

Some 266 of the nation's airlines, including about 30 airlines that do business in Alaska, have been given $3.8 billion in direct grants.

Frontier Flying Service received $133,589 in direct aid under the grant program.

In addition to the Fairbanks-based airline, Vanguard Airlines, a small regional airline based in Kansas City, Mo., has applied for $60 million in federal loan guarantees.

Tempe, Ariz.-based America West Airlines, the nation's eighth largest, had a $380 million loan guaranteed in December by federal regulators.

America West has received $98 million in a direct grant, and Vanguard, $7.2 million.

As part of America West's loan guarantee, the company had to offer a third of its common stock to the government, making it one of the airline's largest shareholders.

While airlines were quick to ask for grant money, they have balked at applying for federal loans, fearing a government stake in their companies.

Hajdukovich said his company could not offer stock options to the government.

"We are a privately held company," Hajdukovich said. "We have nothing to offer.

Hajdukovich's father, John, bought the company in 1974, and remains its sole owner. The company carried a lot of debt in the 1970s and lost money over the next dozen years.

Since 1987, the company has turned a profit, Hajdukovich said, adding that the year-end financial figures are not complete for 2001.

Frontier Flying Service offers five daily flights between Anchorage and Fairbanks, Hajdukovich said. The company serves more than 50 communities in Alaska and is the largest commuter airline in the Interior.

Hajdukovich said the bulk of his airline's business comes in the summer months, so last year's bottom line may not be too bad.

"If (the terrorist attacks) would have come in June, a lot of airlines would be out of business," Hajdukovich said.

Under federal rules regarding the bailout loans, the federal government must be "compensated for the risk it assumes in making the guarantees ... (and) may consider the degree to which the government can participate in the gains of the air carrier through warrant or other equity instruments."

Airlines have until June 28 to apply for the federal loans.

Frontier Flying Service said in its loan application that credit from conventional lenders is not "reasonably available" to the airline because of market risks in the airline industry since the terrorists attacks.

Hajdukovich said that while the events of Sept. 11 had a negative effect on the company's ability to do business, he said the airline "is more concerned with future events."

Securing the $10 million loan also would allow the company to refurbish nine other aircraft the company owns and provide needed working capital, Hajdukovich said.

The airline would have seven years to pay back the loan.

"With the loan guarantee in place, Frontier feels confident that any risk taken by the taxpayer is more than offset by a safe and reliable transportation system in Alaska,'' the company said in its loan application.

James MacPherson is a reporter for the Alaska Journal of Commerce in Anchorage.

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