Founded in 1964 and headquartered in Miramar, Florida, Spirit Airlines Incorporated (SAVE) is a famous low-cost carrier. The company flies to 85 destinations in 16 countries including the United States, Latin America, and the Caribbean. The company owns a fleet of 173 Airbus single-aisle aircraft, making Spirit’s fleet one of the youngest and greenest worldwide. Frontier Group Holdings, Inc. (ULCC) was incorporated in 2013 and is a Denver, Colorado headquartered airline company. The carrier is also known for its low fares and serves around 120 airports in the United States and across the world with a fleet of 100 single-aisle Airbuses. The carrier is considered the most fuel-efficient U.S. airline as well. With a market capitalization of less than $2.5 billion each, Spirit and Frontier are both considered to be mid-market players in an industry that is dominated by the big four players: American Airlines Group Inc. (AAL), Delta Air Lines, Inc. (DAL), United Airlines Holdings Inc. (UAL), and Southwest Airlines Co. (LUV) controlling almost of 86% of the U.S market.
Spirit Airlines and Frontier will merge their business operations but the post-merger name is yet to be announced. Accounting for debt and operating lease liabilities, this deal is valued at approximately $6.6 billion. Upon the completion of the transaction, Frontier shareholders will own 51.5% of the combined company while Spirit shareholders own the remaining 48.5% share on a diluted basis. Seven out of 12 directors of the new company will be elected by Frontier.
The merger brings in several benefits and solutions to the prevailing problems of the two low-cost carriers. In 2021, many airline companies including legacy carriers had to cancel thousands of flights due to health risks and partially because of staff shortages, especially pilots. Spirit Airlines had to increase the payments for both pilots and flight attendants to avoid staff shortages, but these obstacles continued to challenge the company’s expected recovery last year. The merger between the two airlines could eradicate the labor shortage challenges as the combined company will have better bargaining power with its staff. This would be a positive development as it would create some stability and resilience to external shocks in an era where U.S. inflation and the Ukraine crisis are creating even more headwinds for the airline sector.
The rationale highlighted by both Spirit and Frontier when announcing the plans to merge is that a combination of two low-cost airlines can possibly bring about more competition in the industry. This is true, given that the Frontier-Spirit merger has the potential to give birth to the country’s fifth-largest airline with an 8.2% market share, which would pin the company ahead of renowned names such as Alaska Air Group, Inc. (ALK) which owned 5.4% of the market share and JetBlue Airways Corporation (JBLU) which owned 5.3% of the market share in 2021 according to Statista. As per the merger announcement, the new company plans to operate in 145 destinations in 19 countries including small and mid-sized cities in the United States, Latin America, and the Caribbean.
Another silver lining of the merger is the enhanced loyalty program experience for customers which will add to the revenue of the merged company. The two companies separately offer co-branded credit cards and frequent flyer programs, and the merger would result in better and more competitive offers by the credit card companies.
Although the combined company would not be able to surpass the big 4 airline companies from a revenue perspective, it would be reasonable to assume that the new entity will enjoy economies of scale resulting from cost and revenue synergies, and this would help the company easily thwart the competition from other ultra-low-cost carriers.
Regulatory troubles await
The merger still needs regulatory approval from the Department of Justice and the Department of Transportation, obtaining which is quite a lengthy process. Spirit and Frontier have previously come under scrutiny for poor customer satisfaction and a group of progressive Senators is worried that the new merger will result in even lesser concern over customer satisfaction and lead to increased fares once a greater market power is at its disposal. They also argue that there will be potential layoffs despite the to-be-merged companies claiming to create 10,000 direct jobs by 2026. Thus, these lawmakers have persuaded federal officials to scrutinize the plans of the two carriers to merge. Although the two companies are excited about the possible benefits of the merger and expect the deal to be closed by the second half of 2022, the two companies will have to navigate a challenging regulatory environment before realizing these benefits.
The Frontier-Spirit merger will help both companies in terms of increased revenue, better market share, cost savings, and solutions to existing operating problems. The deal sounds like the right decision given that these two carriers were struggling to improve their market share in the recent past, and if the expected synergies can be realized, long-term shareholders stand to gain from this transaction.