Breaking Down the Spirit-Frontier Airlines Merger

Summary
On Monday, the two biggest “ultra-low-cost” airline companies in the US — Frontier Airlines and Spirit Airlines — announced the merger of the two companies in a deal that would value Spirit at $2.9 billion, with a transaction value of $6.6 billion, when including net debt and operating lease liabilities. This merger will create the fifth biggest airline in the country, after the big four of American Airlines, Delta Air Lines, Southwest Airlines and United Airlines, which account for about 70% of all US flights. The companies expect the cash-and-stock deal to accelerate investment and help take on these major U.S. airlines. Frontier would own a 51.5% stake in the combined entity.

Implications of the Merger
In terms of implications, Spirit and Frontier said the deal would deliver $1 billion in annual savings for fliers. The companies said they’d offer ultra-low fares to more destinations, too. Significantly, they want to expand to target “underserved small and mid-sized cities” across the U.S. Given the rising operating costs in the industry, the merged company will be in a good position to combat them. “Some airlines are experiencing more than 20% unit operating cost inflation before considering the rising cost of fuel.” On the cost-savings front, the merger is expected to deliver annual synergies of about $500 million. Furthermore, the companies 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. With both companies flying only Airbus planes and no dominant market share, this merger makes a lot of sense. With their aggressive, ultra-low fare approach, they may just gain a stronger foothold in the industry, increasing the threat of rivalry to the incumbents.

Reactions to the Merger
The public opinion towards this merger has not been pretty given the fact that Spirit and Frontier are infamous in the industry for consistently having the highest percentage of complaints and the lowest customer satisfaction. Comments on social media platforms such as Twitter and Instagram display the backlash the merger has received from everyday consumers, in which they ridiculed the two airlines.

Regulations Regarding the Merger
​​Something to keep in mind is the fact that the merger will have to go through the Department of Justice. The Biden administration has made it clear to corporate America it will scrutinize potential mergers far more aggressively than the Trump administration. In the fall, the Justice Department sued to prevent a domestic alliance between American Airlines and JetBlue Airways, arguing that the agreement would drive up prices and reduce competition. It is possible this merger will also face some form of opposition from the Biden administration.