Spirit and Frontier Airlines plan to merge

The companies have yet to say what brand they’ll fly under or who would lead management of the new airline. The combined company would offer more than 1,000 daily flights to over 145 destinations.

The merged carrier would leapfrog JetBlue (JBLU) and Alaska Air (ALK) in the number of miles flown by paying passengers, according to 2021 statistics, putting them behind the four major airlines that control about 80% of the nation’s air traffic — American (AAL), Delta (DAL), United (UAL) and Southwest Airlines (LUV).

“This transaction is centered around creating an aggressive ultra-low fare competitor to serve our guests even better, expand career opportunities for our team members and increase competitive pressure, resulting in more consumer-friendly fares for the flying public,” said Spirit CEO Ted Christie.

Like most of the US airline industry, Spirit and Frontier have been struggling with losses the last two years as air travel plunged during pandemic. On Monday, Spirit reported a 2021 loss of $440.6 million, excluding special items, such as federal assistance that went to all airlines. That was an improvement from the $719.6 million it lost on that basis in 2020. Frontier reported it lost $299 million on that basis in 2021, roughly the same as its loss in 2020.

But the two airlines’ combined fourth quarter revenue was down only 2% from their combined revenue in the final three months of 2019, ahead of the pandemic. That’s much closer to pre-pandemic levels than at the four major airlines. Much of that is due to the fact they depend primarily on leisure travelers, not business passengers, who have been slower to return to flying.

Low fares, low approval

The combination would bring together two airlines that have very low base fares, but charge passengers extra for most things, including carry-on bags. Although their passengers might like the low fares, many don’t like the experience of flying on them.

Spirit by far had the most number of passenger complaints per number of passengers, according to federal statistics, with 13.25 complaints per 100,000 passengers, according to stats from January through September last year kept by the US Department of Transportation. JetBlue had the second most complaints on that basis with 6.85, while Frontier had the third most in the industry with 5.76. Frontier had by far the worst rate of complaints in the same period of 2020, when it had 60.24 complaints per 100,000 customers.

Frontier and Spirit also had the industry’s worst customer satisfaction ratings, according to the American Customer Satisfaction Index.

Regulatory hurdles

It is also not clear that the merger will be approved by federal antitrust regulators. The Biden administration has taken a much more aggressive approach on antitrust issues. It recently blocked an alliance between American and JetBlue that fell short of a full merger. Increasing competition in the airline industry is one of the issues that the Biden administration has cited as a priority.

Executives involved in the proposed Spirit-Frontier deal say they believe the deal will bring more competition to the industry.

“This is the type of transaction the administration should in fact support,” said Bill Franke, the chair of Frontier’s board and the managing partner of Indigo Partners, Frontier’s majority shareholder, in an interview Monday on CNBC. “It’s beneficial to the consumers. It’s beneficial to the employees. It’s beneficial to the communities that the airlines serve. And at the end of the day, even in combination, these two airlines will control less than 10% of the market.”

The US airline industry has been greatly reshaped by mergers in the last 25 years. The four largest airlines today were formed from a series of mergers of 10 airlines. This would be the United States’ first airline merger since Alaska Air purchased Virgin America in 2016.
Frontier would be the purchasing airline in this deal, as Spirit (SAVE) shareholders would receive 1.9126 shares of Frontier plus $2.13 in cash for each of their shares. That would represent about a 20% premium based on Friday’s closing price. But Spirit shares are up only 12% premarket, while Frontier shares are down 2%, suggesting investor uncertainty about the deal being completed.

Leave a Comment