In the US, two low-cost airlines announced a merger: flights across America will be very cheap

Frontier and Spirit Airlines announced a merger on Feb. 7 that will create a giant ultra-low cost airline. ThePointsGuy.

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The move brings together two ultra-low cost carriers that have complementary fleets and route networks. If the merger is approved, it will create an ultra-low-cost giant that will dominate this segment in the US.

The Feb. 7 announcement gave few details about the new airline's line-up, including whether Frontier and Spirit would continue as separate brands, merge under one of the existing brands, or merge under a new airline. Spirit CEO Ted Christie said in a keynote that the combined company's name and headquarters location would be revealed "in due course."

Frontier and its private equity parent company Indigo Partners are expected to play a leading role in running the company. The airlines said Frontier shareholders will own approximately 51,5% of the combined airline, while Spirit will own 48,5% after the closure.

Spirit shares rose more than 17% after the deal was announced to close at $25,46, while Frontier shares ended the day at $12,82, up 3,5%, according to CNBC.

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Frontier is currently headquartered in Denver, Spirit is headquartered in Miramar, South Florida, and Indigo Partners is headquartered in Phoenix.

Indigo Partners was previously the majority shareholder of Spirit Airlines but sold its stake in July 2013. At the end of the year, the company acquired Frontier.

Impact on prices and consumers

Both airlines presented the merger as a victory for all those affected, including customers.

“I am confident that today’s announcement will change the industry for the benefit of consumers, shareholders, and team members of both Spirit and Frontier,” said Bill Franke, Frontier Chairman and Managing Partner of Indigo Partners, during an investor presentation on Feb. 7.

“This deal will move us from the eighth (largest airline) in the United States to fifth, making us a better alternative to the Big Four, among other things,” Christie said.

“When you combine this with our large scale and our low rates, we are an even better option for consumers,” he added.

In 2021, Frontier held about 2% of the U.S. commercial air travel market, while Spirit held about 3% of the market, according to Cirium.

Combined Spirit-Frontier Network

The combined airline will serve more than 145 destinations on more than 600 non-stop routes across the US, Latin America and the Caribbean.

“The combined airline will also be able to succeed in cities where our companies have previously left, such as Jackson, Mississippi, as well as expand into new smaller cities, such as Eugene, Oregon,” Christie said.

By pooling resources and coordinating its schedules, especially in cities where airlines overlap, the post-merger airline "will be able to use efficient scheduling and high utilization to deliver ultra-low costs," he added.

While the airlines operate in the same markets, only 519 of their 2832 routes overlap, or 18%, according to Cirium. The combined fleet will also help airlines recover from the operational disruptions that low-cost carriers have experienced during the pandemic, Christie said.

“The combined airline will provide enhanced operational reliability through a number of benefits,” Christie said. “Additionally, with a larger consolidated fleet and expanded service to cities across the United States, we will be better positioned to improve recovery capabilities during irregular operations.”

This point was highlighted as Frontier seemed to have gone through a complete operational crisis. The airline's entire fleet was on the ground at noon ET, according to FlightRadar24. As of 12:30 pm ET, 111 Frontier flights had been canceled in a day and 112 were significantly delayed — about 44% of the airline's operations for the day, according to FlightAware.

Young and modern fleet

Both airlines exclusively operate the Airbus A320 family, making it easier to integrate the fleets of the two airlines.

As of December 31, the two carriers have ordered 354 new aircraft, according to Airbus. Airlines plan to receive new aircraft by 2026, increasing their total fleet size by 75% from 283 aircraft in 2021 to 493 by the end of 2026, according to airlines.

The combined airlines will operate the largest fleet of A320neo family aircraft in the US, Christie said. By the end of 2026, nearly 80% of the airline's fleet will be new aircraft, with older A320ceo aircraft making up the remainder.

Indigo Partners signed an agreement to purchase 255 new aircraft of the A320neo family at the Dubai Air Show in November, including 91 A321neos destined for Frontier.

“We will be America's greenest airline with the youngest and most modern fleet in the United States,” Franke said.

Problems ahead

One of the most pressing challenges for a new carrier will be getting regulatory approval. A plethora of airline mergers reshaped the American industry in the 2000s and 2010s, but the current administration in Washington is thought to be cooler after the previous wave of mergers.

The Biden administration has previously indicated a reluctance to approve mergers and coordination in the air travel sector. In 2021, the Justice Department filed an antitrust lawsuit against American Airlines and JetBlue, alleging that their "Northeast Alliance" constituted unfair and uncompetitive practices.

American and JetBlue say that by coordinating their operations in the Northeast, they can better compete with entrenched airlines Delta and United.

It's possible that Spirit and Frontier would use a similar argument. The combined airline will be the fifth largest in the US, behind only American, United, Delta and Southwest. It is likely that they will argue that the combined size will allow them to compete with the big companies by cutting tariffs across the board.

On the other hand, merging the country's two largest ultra-low cost operators into one would eliminate one of the country's largest low cost airlines in the process.

Frontier and Spirit mentioned this in their merger announcement, promising that the merger would enable faster growth and allow the combined carrier to "compete even more aggressively, especially against the dominant Big Four airlines."

“In a competitive industry like ours, lowest cost always wins, and we are proud to continue to deliver that to our customers day in and day out,” he added.

The companies valued the deal at $6,6 billion, assuming net debt and operating lease obligations.

"The deal is focused on building an aggressive, low-fare competitor that will better serve guests, expand career opportunities for our team members, and create value for our shareholders," Ted Christie told analysts.

“We believe we are a perfect fit for Frontier. Our businesses share similar values, including our long-standing commitment to affordable travel,” he added.

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Frontier Chairman Bill Franke, a longtime investor and chief executive of discount airlines, will lead the combined company, which he says will "create America's most competitive airline with ultra-low fares for the benefit of consumers."

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