Flying Together

The United States' largest ultralow cost airlines, Frontier and Spirit, announced plans today to combine. Valued at $6.6 billion, including debt, the deal would create the fifth-largest airline in the U.S.

It comes just as domestic travel is gearing up from the pandemic, wrote Barron's Callum Keown today. More Americans are traveling or plan to travel this year, but the recovery has been uneven. Omicron was just one shock to the industry, which has also had to contend with winter storms, soaring fuel costs, and staffing shortages so far this year.

Frontier and Spirit argue that joining forces will save operating costs and allow them to add new routes and grow faster, including hiring 10,000 new employees by 2026. Frontier shareholders will own 51.5% and Spirit shareholders will own 48.5% of the combined airline.

That's all assuming that the deal passes a lengthy regulatory and antitrust review, requiring approval of both the Justice Department and the Transportation Department. The companies will surely argue that their combination will in fact enhance competition in the airline industry and help lower costs for customers.

Callum wrote:

Spirit and Frontier said the deal would deliver $1 billion in annual savings for fliers. The companies said they’d offer ultralow fares to more destinations, too. Significantly, they want to expand to target 'underserved small and mid-sized cities' across the U.S.

If completed, the merger would be the first made by a major U.S. airline since United Airlines’ deal to buy ExpressJet Airlines closed in 2019. Frontier and Spirit said the combination would allow the companies to 'compete even more aggressively' against American, Delta, Southwest, and United, among others.

Spirit CEO Ted Christie said the idea was to create an aggressive ultra-low-fare competitor. Third Bridge’s [global sector lead Peter] McNally said that competition in the leisure market has heated up because major airlines have added more capacity for domestic travelers because international and business travel has not returned to prepandemic levels.

'Frontier and Spirit are moving to consolidate their positions there with a larger entity that will keep them among the lowest-cost carriers in the industry,' he said.

The lack of exposure to international and business travel is certainly a plus for the low cost carriers. 

Investors seemed to like the proposed deal. Spirit stock gained 17% today and Frontier rose 3.5%.

Read the rest of Callum's reporting here.