Frontier and Spirit merge to create the largest ultra-low-cost airline in the United States
Wall Street sees clear skies for the potential merger of Frontier Group Holdings Inc. and Spirit Airlines Inc., with some regulatory hurdles in a business combination that would solve some staffing issues for the carriers and create the largest airline at very high low prices from the United States. .
and SAVE Spirit,
announced the merger deal earlier Monday, valuing the cash and stock deal at $6.6 billion. The deal is expected to close in the second half of the year.
The combined airline would have a fleet of 287 aircraft and an order book of 354 aircraft, all Airbus SE AIR,
narrow-body jets, Jefferies analyst Sheila Kahyaoglu said in a note. That would represent about 7% of the total U.S. fleet of narrow-body aircraft, she said.
Read also: ‘We could see cheaper flights across the board’: Frontier and Spirit merger could help cost-conscious travelers – with a big caveat
The resulting airline “will create a more aggressive competitor for the major airlines, which will likely put downward pressure on industry fares in an environment where US domestic seats are expected to increase 25% by 2024 from 2019,” she said.
Major regulatory hurdles would generally not be an option given each airline’s relatively small market share, which accounts for about 8% of US domestic seats on a combined basis, said analyst Savanthi Syth of Raymond James.
However, because of the Biden administration’s approach to big business, “some objections” could be raised, Syth said. Necessary approvals include nods from the Departments of Justice and Transport.
The Department of Justice last year mopposed American Airlines and JetBlue’s deals on their Boston and New York operations, saying it would “harm travelers”. The airlines sought to dismiss it, saying the complaint was baseless.
The Spirit-Frontier merger would also fuel speculation about other airline mergers, with investor discussions most often revolving around deals involving JetBlue Airways Corp. JBLU,
Alaska Air Group Inc. ALK,
and Hawaiian Holdings Inc. HA of Hawaiian Airlines,
But Monday’s announcement is unlikely to “stimulate additional near-term combinations,” Syth said.
Cowen’s Helane Becker said the potential merger would solve “a pilot problem” that is hampering the growth of both airlines.
They and other smaller regional airlines are struggling to retain pilots “as their core partners continue to hire farm crew,” Becker said.
Spirit and Frontier are expected to hire about 5,000 pilots over the decade to drive their combined backlog, and pilots “are the driving force for growth,” the analyst said.
“We believe both companies will be able to compete more aggressively with major airlines once they combine,” Becker said. “Consumers will have more choices, as will communities. As things stand, we expect smaller communities to lose service over the next few years as the pilot shortage worsens.
The two airlines also announced fourth quarter results earlier Monday ahead of the merger announcement.
Frontier had a mixed quarter, reporting a lower-than-expected loss on sales that fell short of Wall Street expectations. Spirit also reported a lower-than-expected loss, but its sales beat estimates.
Frontier went public in March 2021 as a bet on a travel rebound as more people became eligible for the first vaccines in the United States
US airlines have relied heavily on revenue from domestic and international short-haul “destination” flights during the pandemic as travel restrictions and border closures have plagued often more lucrative transatlantic flights, long-distance international flights. – couriers and business trips.
Spirit shares are flat over the past three months, while Frontier shares are down nearly 17%. This compares to a pullback of around 4% for the S&P 500 SPX index,
and losses of almost 17% for the US Global Jets ETF JETS,
in the same period.