Budget carriers Frontier Group Holdings and Spirit Airlines Inc on Monday unveiled plans to create the fifth-largest airline in the United States with a $ 2.9 billion bond that is likely to increase competition from traditional carriers.
The proposal to create a new effortless carrier, controlled by Frontier Airlines, boosted Spirit’s shares by as much as 16.7%, although several analysts were pressuring airlines for possible difficulties in obtaining regulatory approval.
“In a competitive industry like ours, the lowest costs always come,” Frontier CEO Barry Biffle told analysts. “These low costs, in turn, will allow us to keep our tariffs low for customers.”
This move comes at a time when the US airline is struggling with volatility in travel demand due to new variants of COVID-19. At the same time, costs are rising amid a combination of rising wages, fuel prices and airport taxes.
Spirit’s wage bill as a percentage of revenue increased by more than 10 percentage points last year compared to 2019. Higher charges forced Frontier to leave airports such as Los Angeles and San Jose in California and stop serving Washington-Dulles and Newark .
The merger, which is expected to be completed in the second half of 2022, is expected to lead to a synergy of $ 500 million a year, mainly through operational savings.
The companies promised to avoid job losses and add 10,000 direct jobs by 2026. They also promised that the merger would bring $ 1 billion in annual savings to consumers and offer more than 1,000 daily flights to more than 145 destinations.
Peter McNally, a global leader in industry, materials and energy at research firm Third Bridge, said the pressure on costs was the biggest threat to the airline’s profit recovery.
The merged company will be in an “excellent” position to combat rising operating costs, McNally said.
However, some analysts have warned that the deal could meet with resistance from the White House, as the administration of US President Joe Biden has taken a firm stand on major corporate mergers.
The US Department of Justice (DOJ) has filed an antitrust lawsuit against American Airlines Group Inc and JetBlue Airways Corp for their partnership, arguing that it will lead to higher prices at busy airports in the northeastern United States.
Biffel acknowledged that the Frontier-Spirit deal would require approval from the Justice Department, but predicted it would be “well received” by regulators because it would lead to “low prices for more people in more places”.
Shares of Spirit Airlines rose 14.0 percent to $ 24.78 at noon on Monday. Shares of Frontier rose 0.8% to $ 12.49.
Prominent investor Bill Franke, a pioneer of the lowest fares combined with top-up fees offered by ultra-low-cost carriers (ULCC), will chair the new airline, whose brand and CEO have not been announced.
Franke Indigo Partners, a private equity firm that is a majority shareholder in Frontier, has previously invested in Spirit, which was once considered a candidate for Frontier.
The ULCC is a level below Southwest Airlines, which pioneered the concept of low cost in the 1970s and continued to expand during the COVID-19 pandemic.
The companies expect the cash and equity deal to accelerate investment and help take over major US airlines such as American Airlines, Delta Air Lines, Southwest Airlines and United Airlines Holdings.
The merger will cost $ 6.6 billion, including net debt and operating lease obligations.
The Colorado-based Frontier will own a 51.5% stake in the combined entity.
Under the deal, Spirit shareholders will receive $ 25.83 per share, a premium of 18.8% from Friday’s close.
Both airlines use Airbus SE aircraft and signal that they are not seeking cancellation of aircraft orders.