Frontier Airlines and Spirit Airlines are seeking to merge in a $2.9 billion transaction that would create a larger budget airline to compete against the nation’s main airlines while also promoting cheaper rates, according to the companies.
Both are ultra-low-cost carriers that entice customers with dirt-cheap fares for no-frills service, but they also create a lot of customer complaints.
Antitrust officials in the Biden Administration, which has expressed a harder stance against large corporate acquisitions, are expected to scrutinize the deal closely. Consumer activists have chastised the Obama administration for permitting a spate of significant airline acquisitions that have dramatically concentrated industry power.
However, the Frontier-Spirit merger would only be fifth in passenger capacity and seventh in revenue among US airlines. Frontier and Spirit are positioning their merger as a counterweight to American, Delta, United, and Southwest, which dominate around 80% of the US air travel industry.
In an interview, Frontier CEO Barry Biffle stated, “The Biden administration has made it pretty plain over the last year that they would like to increase competition in the airline market, and this is basically a solution to restore balance from a competitive standpoint to the big four.”
Because of Frontier and Spirit’s tiny size, Savanthi Syth, an airline analyst for Raymond James & Associates, said she wouldn’t foresee antitrust difficulties “in a normal climate… but given the Biden Administration’s ‘large is evil’ mentality, we would expect some protest.”
Last September, the Biden administration filed a lawsuit in the Northeast, claiming that a collaboration between American Airlines and JetBlue would restrict competition and raise costs. The case is still open.
Airlines are “definitely an industry where there is a notion that a number of mergers got through that maybe shouldn’t have,” according to Daniel Crane, an antitrust specialist and law professor at the University of Michigan. “There is a clear focus on being more active on mergers,” he added, citing the Justice Department’s challenge of the American-JetBlue transaction.
As the epidemic enters its third year, airlines are fighting to recover. Frontier and Spirit both announced fourth-quarter losses on Monday, with Spirit losing $87.2 million and Frontier losing $53 million. Both companies also forecasted losses for the entire year of 2021.
The airlines believe that allowing them to join will open up numerous new routes that aren’t now offered by ultra-low-cost carriers, saving customers $1 billion per year. They further claim that by 2026, the merged firm will have grown and created 10,000 additional employment.
In recent years, ultra-low-cost airlines have shook up the airline sector, luring passengers away from established carriers and luring those who refuse to pay major-airline tickets with their reduced cost structure, which includes less-senior staff. Frontier and Spirit claim that their per-mile expenses are up to 40% cheaper, which will deter larger airlines from matching their pricing.
Budget airlines, on the other hand, do not have the same benefits as the major airlines. They don’t fly long international routes, have smaller frequent-flyer programs, and operate fewer flights per route, leaving less alternatives for rebooking passengers in the event of a flight cancellation or delay.
Frontier and Spirit regularly have some of the industry’s highest complaint rates; in the Transportation Department’s most recent monthly numbers, they were placed worst and second to last. Many of the complaints are about planes being canceled or delayed. The airlines claim that by joining forces, they would be able to build a more dependable airline with fewer flight delays.
While the airlines were claiming this, the Federal Aviation Administration ordered all Frontier flights across the country to be grounded due to “automation difficulties.” By lunchtime, Frontier had canceled or delayed more than 110 flights, accounting for more than 20% of their schedule.
Frontier spokesperson Jennifer De La Cruz said the incident was due to a technological glitch that has been resolved. She stated that the airline was attempting to restore the rest of the day’s flying schedule.
Frontier and Spirit have a total of 280 planes on order, with another 350 on the way. The merged airline, according to Spirit CEO Ted Christie, would establish additional flights across the United States, as well as in Latin America and the Caribbean.
The airlines did not reveal the name of the merged firm, its CEO, or its headquarters location. Frontier Chairman Bill Franke, who will lead a committee that will make such choices and will also serve as chairman of the combined firm, believes there is no need to make such announcements until the merger is certain to go through.
“Right now, we need regulatory scrutiny and backing for the deal,” said the executive. That might take months,” said Franke, who was originally the chairman of Spirit and whose investment firm, Indigo Partners, is now Frontier’s largest stakeholder.
Frontier stockholders would control 51.5 percent of the new firm, according to the acquisition statement. Spirit shareholders will get 1.9126 Frontier shares plus $2.13 in cash for each share of Spirit, valuing Spirit at $25.83 per share based on Frontier’s Friday closing stock price of $12.39.
The deal is expected to finalize in the second part of the year, according to the firms. Spirit shareholders must yet approve it.
Spirit, located in Miramar, Florida, jumped 17.2 percent to $25.46 in Monday trade, while Frontier, based in Denver, gained 3.5 percent.