By Mike Caggeso

Associate Editor

Denver-based Frontier Airlines Holdings, Inc. (FRNT) – parent company of Frontier Airlines – announced Friday that it is has filed for Chapter 11 bankruptcy protection, citing unexpected problems with its credit card processor.

Frontier said it would continue normal business operations – operating its full schedule of flights and maintain employee wages, healthcare, vacation and other benefits.

President and Chief Executive Officer Sean Menke went into detailed length about the airline industry's woes, how Frontier is holding up to them and what to expect in the next year.

"To be clear, we filed for very different reasons than those of other recent carriers, and our customers and employees can be confident that we intend to keep on flying and providing outstanding service and products," Menke said.

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"We felt that Frontier would be able to withstand the challenges confronting the U.S. airline industry, which include unprecedented and significant increases in the cost of jet fuel and the impact of the credit crisis in the financial markets, without seeking bankruptcy protection. Frontier has continued to perform relatively well in this difficult environment, and contrary to the trend, we have not seen a decrease in consumer demand, as demonstrated by our record traffic and revenue in March."

But its principal credit card processor – which remained nameless – unexpectedly informed the company that significant proceeds from ticket sales would be withheld beginning last Friday.

"Unchecked, it would have put severe restraints on Frontier's liquidity and would have made it impossible for us to continue normal operations," Menke said.

Freefalling Airlines

The near freefall of the U.S. airline industry is strongly reminiscent of the downfall of financials that began tumbling last summer.

Like the financials, most of the airlines are suffering the same major problems – increased fuel costs, slowing demand and a weakening U.S. economy. At the same time, efforts to increase cost efficiencies through mergers have been blocked by labor unions.

And recently, nearly every U.S. carrier has felt the burn.

On Thursday, the world's largest air carrier, American Airlines – principal subsidiary of AMR Corp. (AMR) – canceled 933 to continue inspections on MD-80 aircraft wiring. Last week alone, American cancelled more than 2,500 flights and stranded an estimated 100,000 travelers.

Two weekends ago, Skybus Airlines shut down operations and declared bankruptcy, becoming the third carrier in the span of a week to close its doors – joining the ranks of Columbus, Ohio-based carrier joined Aloha Airgroup Inc.'s Aloha Airlines and ATA Airlines Inc.

Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) have been in merger talks for months now, with a major holdup coming from the 12,000 pilots between them who've yet to endorse the deal.

Also in the merger arena, UAL Corp.'s (UAUA) United Airlines and Continental Airlines Inc. (CAL) had also started talks earlier this year, but negotiations are on pause as the two airlines are waiting to see what happens with Delta and Northwest, a source with knowledge of the matter told Reuters.

A report from Calyon Securities predicted the U.S. airline industry would lose more than $1 billion in 2008, mostly from the one-two combo of high fuel costs and shrinking demand, Reuters reported. However, top carriers Delta, Northwest and Southwest Airlines Co. (LUV) are best positioned to weather the storm, Calyon analyst Ray Neidl said.

Frontier's shares hit near rock bottom Friday, falling 69.43% to close at $0.48 per share.