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Frontier Air Files for Bankruptcy, but Keeps Flying

Low-cost carrier Frontier Airlines Holdings has filed for bankruptcy, becoming the fifth U.S. carrier in two weeks to take drastic measures as soaring fuel prices and economic weakness bear down on the industry.

But the crisis at Frontier , which said it would continue flying during Chapter 11 reorganization, is different from that at Aloha Airlines, Champion Air, ATA Airlines and Skybus Airlines, all of which shut down last week citing fuel costs.

Aside from fuel costs -- which jumped more than 20 percent in 2007 to $2.58 per gallon -- Frontier also faces an eroding cash position caused by changes imposed by its credit card processor, First Data.

"To be clear, we filed for very different reasons than those of other recent carriers," Frontier Chief Executive Sean Menke said in a statement.

"Unfortunately, our principal credit card processor very recently and unexpectedly informed us that, beginning on April 11, it intended to start withholding significant proceeds received from the sale of Frontier tickets," he said.

The change to Frontier's deal with First Data, would "put severe restraints on Frontier's liquidity and would have made it impossible for us to continue normal operations," Menke said.

Frontier said it has enough cash to meet its operating needs. The airline, founded in 1994, competes with Southwest Airlines and JetBlue Airways from its hub in Denver.

Pressure from its credit card processor also helped push US Airways into Chapter 11 bankruptcy in 2002. The carrier restructured but fell into bankruptcy a second time before merging with America West Airlines in 2005 to form the new US Airways Group.

"Frontier's Chapter 11 filing is not expected to have any material near-term implications on industry fundamentals," JP Morgan analyst Jamie Baker wrote in a research note. "Though it will likely propel the issue of credit card holdbacks to the forefront of many investors' minds, particularly as it relates to discount airlines."

Tough All Over

The U.S. airline industry has been struggling amid record high fuel prices and a weakening economy.

The demise of Aloha Air, Champion Air, ATA Air and Skybus Air, which operated in fringe markets, underscored the potential for financial disaster at all U.S. carriers. Some experts had predicted failures at smaller low-cost airlines like Frontier.

"At this point, you can't say it's a one-off because we've seen several bankruptcies," said Marissa Thompson, airline analyst at Morningstar. "These are the airlines we had on our short list that we expected some kind of financial distress."

Frontier, which posted a wider first-quarter loss on higher fuel prices, said in January it would sell four of its nearly two dozen Airbus jets to slow its capacity growth and bolster its cash position.

Frontier said in a Thursday filing in U.S. Bankruptcy Court, Southern District of New York, that it employs 6,115 workers. About 22 percent of those workers are represented by unions.

Frontier shares were down $1.16 to 41 cents in morning Nasdaq trade.