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Spirit And Frontier Airlines Get Urge To Merge

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Frontier Airlines and Spirit Airlines announced a proposed merger on February 7. While Frontier and Spirit are ultra-low-cost carriers (ULCCs) the merger is for big money, a reported $6.6 billion in a combined cash and stock deal. That day, Frontier (ULCC: NASDAQ) rose 3.47% while Spirit (SAVE: NYSE) soared +17.17% on the news.

If federal regulators approve the deal, airline market share numbers will move as well. While the Big 4 (American, Southwest, Delta and United) will remain the largest U.S. carriers, the Frontier/Spirit combo will leap into fifth place with a market share of 8.7%, ahead of Alaska and Jet Blue, each with about 5.3% of the market.

(Full disclosure: I own stock in Southwest Airlines, American Airlines and Jet Blue.).

Frontier Airlines, owned by private equity company Indigo Partners, appears to be acquiring Spirit.

“I was not expecting an airline merger announcement when I woke up this morning,” says Kerry Tan, Ph.D., associate professor of economics at Loyola University, Maryland. Tan, whose area of expertise is airline competition, says, “The pandemic has really hurt business travel and airlines in general. So, both traditional and low-cost airlines are trying to target leisure travelers, such as families trying to go on vacation.”

According to a statement from Ted Christie, President & CEO, Spirit Airlines, The combined airline is expected to:

•       Deliver $1 billion in consumer savings.

•       Offer more than 1,000 daily flights to 145 destinations in 19 countries, across complementary networks.

•       Expand with more than 350 aircraft on order to deliver more ultra-low fares.

•       Increase access to ultra-low fares by adding new routes to underserved communities across the United States, Latin America, and the Caribbean.

•       Deliver even more reliable service through a variety of operational efficiencies.

•       Expand loyalty and membership offerings.

Tan believes that the major airlines “are not too scared” by the potential merger, but the question is how other low-cost carriers, like Allegiant, Sun Country, Breeze and Avelo respond. “Will Allegiant merge with others, or try to expand to compete?” Tan asks. “They could potentially look into a merger of their own with Sun Country as a possible acquisition target.”

Interestingly, Spirit, with 5% of the US airlines market, is currently larger than Frontier, which has 3.5%. If the combination is approved, the name of the new company is still up in the air. Many observers believe that neither airline has particularly strong brand equity.

Spirit infamously cancelled more than 2000 flights in one week last August. As Tan puts it, “Spirit is not necessarily known for being the best on time performer.” He noted, “The ongoing pandemic has been devastating for airlines so it’s not surprising that Frontier is taking advantage of this opportunity to acquire a rival ULCC.”

Before the merger was announced, Spirit was trading slightly above its yearly low, with earnings per share of -5.36, a price to earnings ratio of -14.75 and return on equity of -23.58%. Frontier was trading within about a dollar of its year low, with equally unimpressive earnings numbers. Does putting two weaker companies make a stronger one? Tan noted, “If they maintain status quest their existence is in question.”

For the merger to happen, Tan says the two airlines will need approval from the Department of Justice, then an FAA single certificate operating certification. Tan believes that if the merger takes place, it may take three years to finalize. The merger process “took Southwest and Air Tran about three years, and it took three years for the Virgin America and Alaska.”

An additional factor may be paying back the loan portion of the government bailout Spirit and Frontier (and most other US airlines) received. Frontier reportedly put up senior debt or equity warrants to get desperately needed cash in 2020. Airline sources believed that Frontier and Spirit, and other ULCCs, were being unfairly penalized by being forced to operate nearly empty during COVID’s darkest days.

Still, the proposed merger might be easier to pull off than previous ones. Spirit operates an all-Airbus fleet of 175 A319, A320 and A321 twin-jet single-aisle aircraft. So does Frontier, so there would be expected operating efficiencies. Southwest flies Boeing 737 aircraft, so in theory pilots, flight attendants and mechanics can work on most planes. Similarly, the Spirit/Frontier combination would enjoy commonality with the Airbus A320 family.

Tan does say that the meshing of pilots; “how pilots are able to negotiate seniority and rank,” would not be effortless. In a merger, “You’re always going to get groups of pilots fighting over turf.”

But Tan believes that the merger may actually add service. “Spirit has Southeast, Frontier has the Midwest and the Mountain States. There could be some synergies on their route network, which is why they are likely to get government approval.”

The most overlap is in two destinations, Las Vegas and Orlando. These also have strong presence from other airlines, so completion will remain. Tan also believes there may be efficiencies at route networks, an improved portfolio of destinations, and potential reductions in corporate staff and locations. Spirit is currently based in Florida, Frontier in Denver.

Considering the lingering impact of the pandemic, Tan does not yet “see the light at the end of the tunnel for these airlines.” But he says winners of the deal will include passengers interested in leisure markets like Orlando or Las Vegas where both airlines have a strong presence.

With major cities like Orlando, Ft. Lauderdale and Denver as hubs, Tan says “I expect an increase in the number of destinations from these locations as well as improved on-time performance with a larger fleet for the combined airline.”

The bottom line? Tan says, “This merger may benefit families who can expect competitive airfares to leisure destinations, especially as travelers become more comfortable traveling on planes.”