May 11, 2008
No surprise: First Data nearly led to last of Frontier
By Al Lewis
Denver Post Staff Columnist
First Data Corp. chief executive Michael Capellas said Friday that he didn't force Frontier Airlines into bankruptcy.
The numbers did.
I had been meaning to ask Capellas about this since Denver's favorite airline blamed Capellas' credit-card processing company for its Chapter 11 filing last month. I didn't get the chance until Capellas took questions from the crowd at the Southeast Business Partnership's annual meeting in the Denver Tech Center.
"We have probably one of the
most dedicated customer orientations I've ever seen," said Capellas, who has been chairman of Compaq Computer, president of Hewlett-
Packard and CEO of MCI and is still on the board at Cisco.
The story Frontier CEO Sean Menke told me, though, isn't an inspiring testament to First Data's "dedicated customer orientation."
Menke said First Data demanded $75 million within three days.
This demand for more collateral included a threat to withhold a higher percentage of the money First Data collects from Frontier's credit card-
It would have fatally crimped Frontier's cash flow, Menke said.
"We got the letter on Tuesday," Menke said. "They made a business decision. We tried to have them reverse that business decision and weren't able to, which forced me to make a business decision. And that's what it boiled down to."
Frontier was already struggling with $115-a-barrel oil (now $126).
The credit crunch left it unable to immediately borrow against the $200 million in equity it holds in aircraft, Menke said.
Perhaps First Data had to demand more collateral from Frontier as airline industry fundamentals worsened. If Frontier Airlines shut down tomorrow, First Data might have to reimburse the airline's credit-card customers who did not get their flights.
But even a landlord who jacks up the rent typically gives tenants a 30-day notice. What did First Data expect when it demanded $75 million in collateral from a small airline with a three- day notice?
"We were surprised by the bankruptcy filing," Capellas said Friday.
And I'm surprised by that answer.
First Data processes $1.3 trillion worth of transactions a year, equivalent to roughly 10 percent of our nation's gross domestic product. It was a publicly traded company until the renowned buyout firm Kohlberg Kravis Roberts & Co. took it private in September and put Capellas in charge.
"If we were a public company, we would be between 250 and 300 on the Fortune 500 list," Capellas boasted.
"We have a fascinating window into the world," he continued. "We will run up a scale of ... 8, 9 or 10 billion transactions in every space. So we have the ability on a grand basis to say what is happening in the economy, both domestically and outside."
Yet Frontier's bankruptcy was a complete surprise?
Capellas is the kind of CEO who holds a big pep rally for his employees just before he takes the hatchet to their jobs.
I watched him do this in 2002.
I stood among 1,000 WorldCom (now MCI) employees in Glendale. They twirled noisemakers, threw confetti and shook pompoms as a rented sound system blasted the Doobie Brothers' "Takin' It to the Streets."
They were cheering their new CEO, Capellas, because he was not Bernie Ebbers, who had just cooked up a bigger accounting fraud than Enron. They seemed blissfully unaware of the gut-job that would follow - and oblivious to the lyrics in the song Capellas was blasting as he took the stage:
"Ah, you. Telling me the things you're gonna do for me. I ain't blind, and I don't like what I think I see. Takin' it to the streets."
Capellas only fed their misplaced optimism as he sharpened his ax. Now he's swinging it for First Data, which took on $22 billion in debt after KKR's buyout, and just in time for the recession.
"We treat our customers in a very clear manner," Capellas said in response to my question about Frontier. "This is not ... a process where somebody sits around in a dark room and makes individual decisions. We have very sophisticated, very precise, very methodical risk management.
"It is a mathematical modeling process. There is a contract that stands behind it. We went through our normal process. ... It certainly wasn't in any way, shape or form an individual issue. ... This is the business we are in."
Al Lewis' column appears Sundays, Tuesdays and Fridays. Respond to him at blogs.denverpost.com/lewis, 303-954-1967 or email@example.com