Budget carriers Frontier Group Holdings and Spirit Airlines Inc on Monday unveiled plans to create the fifth-largest United States airline in a $2.9bn tie-up likely to tighten competition against traditional carriers.
The proposal to form a new no-frills carrier controlled by Frontier Airlines pushed up shares of Spirit as much as 16.7 percent, though several analysts pressed the airlines over possible difficulties in obtaining regulatory approval.
“In a competitive industry like ours, the lowest costs always win,” Frontier Chief Executive Barry Biffle told analysts. “These low costs will, in turn, enable us to keep our fares low for customers.”
The move comes at a time when the US airline industry is grappling with volatility in travel demand due to new COVID-19 variants. At the same time, costs are soaring on a combination of rises in wages, fuel prices and airport charges.
Spirit’s wage expense as a percentage of revenue shot up by more than 10 points last year versus 2019. Higher fees prompted Frontier to exit airports such as those in Los Angeles and San Jose in California, and stop serving Washington-Dulles and Newark.
The merger, which is expected to close in the second half of 2022, is projected to result in synergies of $500m a year, mainly through operational savings.
The companies pledged to avoid any job losses and add 10,000 direct jobs by 2026. They also promised the merger would deliver $1bn in annual consumer savings and offer more than 1,000 daily flights to more than 145 destinations.
Peter McNally, global sector lead for industrials, materials and energy at research firm Third Bridge, said cost pressure is the biggest threat to recovery in the airline industry’s profit.
The merged company would be in an “excellent” position to combat rising operating costs, McNally said.
But some analysts warned the deal could face opposition from the White House as US President Joe Biden’s administration takes a tough stance on big corporate mergers.
The US Department of Justice (DOJ) has filed an antitrust lawsuit against American Airlines Group Inc and JetBlue Airways Corp over their partnership, alleging it would lead to higher fares in busy Northeastern US airports.
Biffle acknowledged the Frontier-Spirit deal would require DOJ approval but predicted it would be “well received” by regulators because it would lead to “low fares to more people in more places”.
Shares of Spirit Airlines were up 14.0 percent at $24.78 at midday on Monday. Frontier’s shares were up 0.8 percent at $12.49.
Renowned airline investor Bill Franke, a pioneer of rock-bottom fares coupled with top-up charges offered by ultra low-cost carriers (ULCCs), will be chairman of the new airline, whose brand name and CEO have not been announced.
Franke’s private equity firm Indigo Partners, which is Frontier’s majority shareholder, had previously invested in Spirit, which was once considered a suitor for Frontier.
ULCCs are a tier below Southwest Airlines, which pioneered the low-cost concept in the 1970s, and they have continued to expand during the COVID-19 pandemic.
The companies expect the cash-and-stock deal to accelerate investment and help take on major US airlines like American Airlines, Delta Air Lines, Southwest Airlines and United Airlines Holdings.
The merger would be worth $6.6bn including the assumption of net debt and operating lease liabilities.
Colorado-based Frontier would own a 51.5 percent stake in the combined entity.
Under the deal, Spirit’s shareholders would receive $25.83 per share, a premium of 18.8 percent to Friday’s close.
Both airlines use Airbus SE jets and signalled they were not looking at cancelling plane orders.