Frontier Airlines and Spirit Airlines, the two largest low-cost carriers in the U.S., have agreed to merge in a deal valued at $6.6 billion, creating what would become the fifth-largest airline in the country.

The merger gives Denver-based Frontier Airlines a 51.5% controlling stake in the combined airline. Spirit investors will receive 1.9126 shares of Frontier plus $2.13 in cash for each share they own, giving Spirit shareholders an implied value of $25.83 per share, which is a 19% premium over the value of Spirit shares at the end of last week, the companies said.

“This transaction is centered around creating an aggressive ultra-low fare competitor to serve our guests even better, expand career opportunities for our team members and increase competitive pressure, resulting in more consumer-friendly fares for the flying public,” Ted Christie, president and CEO of Miramar, Fla.-based Spirit, said in a statement announcing the deal.

The boards of both companies approved the deal over the weekend. The deal would be the first merger U.S. airlines since the Alaska Airlines combination with Virgin America in 2016.

Spirit shares surged 13% in morning trading, while Frontier’s were up 0.2%.

Frontier Chairman Bill Franke, a longtime discount airline investor and executive, will chair the combined company, which he said “will create America’s most competitive ultra-low fare airline for the benefit of consumers.”

The companies didn’t announce the new name of the combined carrier, the CEO or location of the airline’s headquarters. Those questions will be answered by a committee led by Franke after the transaction closes, which is expected in the second half of the year, pending regulatory and shareholder approval. Labor unions were informed early Monday, the airlines said. Pilots at Frontier and Spirit are represented by the same union, as are its flights attendants.

The deal comes as carriers are trying to recover from the pandemic. Fast-growing discount airlines like Spirit and Frontier that focus on price-sensitive leisure travelers were able to weather the crisis better than their larger-carrier competitors that are more reliant on international and business travel for revenue, two segments that have still lagged in the recovery.

For Franke, the deal is the latest in a career of making investments in and overseeing low-fare airlines around the world, including Spirit. From 2006 through 2013, Indigo Partners held a stake in Spirit with Franke serving as chair of the airline before he resigned when Indigo sold its position in the carrier. Shortly after that move, Indigo bought Frontier Airlines from Republic Airways for $145 million.

Spirit Airlines aircraft are seen parked at the end of a runway at Orlando International Airport on the sixth day the airline has cancelled hundreds of flights.

Paul Hennessy | LightRocket | Getty Images

Since that acquisition, Denver-based Frontier has steadily expanded its route network with new destinations and additional flights, often targeting cities where larger airlines like Southwest have a strong presence. In almost every case, Frontier enters with low fares to gain a foothold with price-conscious travelers.

Known for its bright yellow planes, Spirit has also been aggressively expanding in the last decade and plans to continue that strategy once combined with Frontier. The two airlines held deal talks “in earnest” late last year.

“It makes a lot of sense and the opportunity has been ripened by the demand patterns of the pandemic,” said Samuel Engel, senior vice president at consulting firm ICF.

In 2013, Spirit and Frontier had 2.8% of the revenue passenger miles flown by U.S. airlines, according to the Department of Transportation. By 2019, their combined market share had almost doubled to 5.4% while the four largest airlines in the U.S., American Airlines, Delta Air Lines, United and Southwest, controlled 73.9% of revenue passenger miles

With both carriers flying only Airbus planes and neither dominating one particular market, a Spirit-Frontier merger makes sense on paper. Still, the Biden administration has made it clear to corporate America it will scrutinize potential mergers far more aggressively than the Trump administration.

In September, the Justice Department sued to block a partnership in the Northeast U.S. between American and JetBlue, arguing it would reduce competition and drive up air fare. The two carriers have denied that and said the alliance, which went into effect last year, allows them to better compete against Delta and United in congested markets like New York, Newark, New Jersey and Boston.

“In a normal environment we would not expect any regulatory hurdles, but given the Biden Administration’s “big is bad” approach that has led to DOJ lawsuit against what appears to be a pro-competition Northeast Alliance by American and JetBlue, we would expect some objection,” wrote Savanthi Syth, airline analyst at Raymond James.

Other analysts, however, were upbeat that the deal would be approved.

“We believe the proposed transaction will be approved by regulators given the minimal overlap of route networks and the fact that it is likely to be viewed as proconsumer,” Deutsche Bank airline analyst Michael Linenberg said in a note.

-CNBC’s Meghan Reeder contributed to this article

Source link


Please enter your comment!
Please enter your name here