In a statement budget carriers Frontier Group Holdings and Spirit Airlines Inc announced their merger in a bid to create the fifth-largest U.S. airline in a deal worth $2.9 billion.
With the news of the proposal to create a new carrier which will be controlled by Frontier Airlines, the share prices of Spirit soared by 18.7%, although several analysts pointed to hurdles facing the deal in obtaining regulatory clearance.
“In a competitive industry like ours, the lowest costs always win,” said Frontier Chief Executive Barry Biffle to analysts. “These low costs will, in turn, enable us to keep our fares low for customers.”
The development comes at a time when the U.S. airline industry faces headwinds in terms of volatility in travel demand because of new COVID-19 variants as well as rising costs and the combination of a hike in wages, fuel prices and airport charges.
Spirit’s wage expense as a percentage of revenue shot up by more than 10 points in 2020 compared to the previous year. Higher fees prompted Frontier to exit airports such as Los Angeles and San Jose in California, and stop serving Washington-Dulles and Newark.
The potential merger, which is expected to close in the second half of 2022, is projected to result in synergies of $500 million a year, mainly through operational savings.
Both companies have pledged to avoid any job losses and add 10,000 direct jobs by 2026. They also promised the merger would deliver $1 billion in annual consumer savings and offer more than 1,000 daily flights to over 145 destinations.
The merged company would be in an “excellent” position to combat rising operating costs, opined Peter McNally, global sector lead for industrials, materials and energy at research firm Third Bridge.
Some analysts are however apprehensive that the Biden Administration could oppose the deal given its stance on large corporate mergers.
The Department of Justice (DOJ) declined to comment on the proposed merger.
A spokesperson for the White House did not comment on the proposal but said the administration “is committed to protecting competition across a wide range of industries for the benefit of consumers.”
Incidentally, the DOJ has filed an antitrust lawsuit against American Airlines Group Inc and JetBlue Airways Corp over their partnership, alleging that it would lead to higher fares in Northeastern U.S. airports.
Acknowledging the headwinds facing the deal, Biffle predicted that the deal would be “well received” by regulators since it would lead to “low fares to more people in more places”.
Data from Cirium, an aviation data company, shows the two carriers overlap in only 18% of their routes.
Under the cash-and-stock deal, Spirit’s shareholders would receive $25.83 per share, a premium of 18.8% to Friday’s close.
Both airlines use Airbus SE jets and signalled they were not looking at cancelling airplane orders.