Frontier bids $2.9 billion for rival budget airline Spirit

Frontier Airlines and Spirit Airlines propose to merge in a $2.9B deal. This would create a larger discount carrier to compete with the nation's top carriers and promote lower fares.

Frontier bids $2.9 billion for rival budget airline Spirit

These are both ultra-low-cost carriers, which tempt travelers with their rock-bottom prices and no-frills service. However, they often have more consumer complaints than they get.

Antitrust regulators in Biden Administration will likely examine the deal closely. They have taken a harder line against large corporate mergers. Consumer advocates have criticized the Obama administration's allowing major-airline mergers to consolidate power in the industry.

The combination of Frontier and Spirit would be ranked fifth in U.S. airline passenger-carrying capacity, and seventh in revenue. Frontier and Spirit want to merge as a counterbalance for American, Delta, United, and Southwest which together hold about 80% of the U.S. airline travel market.

Frontier CEO Barry Biffle stated that the Biden administration made it clear in the past year that they want to encourage competition in the airline industry. This is a way to return balance from a competitive perspective towards the big four."

Raymond James & Associates airline analyst Savanthi Syth said that she would not expect antitrust issues due to Frontier and Spirit's small sizes. However, given the Biden Administrations 'big is evil' approach, we would expect some objection.

Last September, the Biden administration sued to block an agreement between American Airlines and JetBlue in the Northeast. They claimed it would lower competition and increase prices. The case is still pending.

Antitrust experts believe that airlines are an industry in which there is a perception of a lot of mergers that may have been wrong. Daniel Crane, a University of Michigan professor of law and antitrust expert, said that this perception can be found in antitrust circles. He said that there is now a greater focus on mergers, with the Justice Department challenging American-JetBlue's deal.

As the pandemic continues into its third year, airlines are having difficulty recovering. Both Spirit and Frontier reported Monday fourth quarter losses of $87.2 million for Spirit and $53 million respectively for Frontier. Both companies also reported full-year losses in 2021.

According to the airlines, merging will allow them to create new routes not currently covered by ultra-low cost carriers. This will result in $1 billion in savings each year for consumers. The combined company will also grow, creating 10,000 jobs by 2026.

In recent years, ultra-low-cost airlines have shaken the industry by using their lower cost structure (including less-senior employees) to lure customers away from established carriers and attract people who are reluctant to pay major-airline fares. Frontier and Spirit claim their per-mile costs are as low as 40%, which will deter larger airlines from matching them.

However, budget airlines lack the advantages of giant carriers. They don't fly long distances, have smaller frequent-flyer programmes, and operate fewer routes per route. This means that they are less likely to be able to rebook passengers in the event of a cancellation or delay.

Frontier and Spirit have some of the highest complaints rates in the industry. They were last and next to the last in latest Transportation Department monthly figures. Many of these complaints relate to cancelled or delayed flights. They claim that by merging, they will be able to create a more reliable airline with fewer flight disruptions.

The airlines were saying this, but the Federal Aviation Administration ordered all Frontier flights to be grounded nationwide due to "automation problems." Frontier had already canceled more 110 flights (more than 20%) and delayed another similar number.

Jennifer De La Cruz, Frontier spokeswoman, said that the problem was technology-related and was being fixed. She stated that Frontier was working to restore its flight schedule for today.

Frontier and Spirit share a total of 280 aircraft, with more than 350 currently in order. Ted Christie, Spirit CEO, stated that the airline will add new routes in the United States as well as Latin America and the Caribbean.

The airline companies did not reveal the name of the new company, the CEO or the address of the headquarters. Frontier Chairman Bill Franke is the chairman of a committee that will make these decisions and will also serve as chairman for the new company. He said that there was no reason to announce any such information until it is certain that the merger will proceed.

"We need regulatory oversight and support for the transaction right now. It could take several months," Franke, who was once Spirit’s chairman and whose Indigo Partners investment company is Frontier's largest shareholder, said.

The deal announced that Frontier shareholders will be able to own 51.5% of this new company. Spirit shareholders will receive 1.9126 shares and $2.13 cash for each Spirit share. This value places Spirit at $25.83 per Share based on Frontier’s closing stock price on Friday of $12.39.

Both companies anticipate closing the transaction by the end of the second half year. The transaction still requires approval from Spirit shareholders.

On Monday, shares of Miramar's Florida-based Spirit rose 17.2% and closed at $25.46. Frontier, based in Denver, gained 3.5%.

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