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Frontier, Spirit announce merger to create fifth-largest U.S. airline

Executives say deal would allow the combined airline to more aggressively compete against the ‘Big Four’ carriers

A Frontier Airlines jetliner taxis to a runway to take off from Denver International Airport. (David Zalubowski/AP)

Spirit Airlines and Frontier Airlines announced plans Monday to merge, a move that executives at the low-cost carriers say would create a company able to compete more aggressively against its largest rivals while offering cheaper fares and service to smaller cities. The deal would create the nation’s fifth-largest carrier.

Frontier agreed to acquire Spirit for $2.9 billion in cash and stock, a transaction valued at $6.6 billion when accounting for debt and operating lease liabilities. Executives say it would allow the combined airline to be more competitive against the “Big Four” carriers — American Airlines, Delta Air Lines, Southwest Airlines and United Airlines.

The announcement comes amid a period of change for the airline industry, which saw interest in travel plummet at the start of the coronavirus pandemic, only to be caught flat-footed this past summer when demand rebounded. Airline officials and analysts say the combined airline could benefit from a rise in leisure travel, even as the lucrative business travel industry struggles to regain its pre-pandemic footing.

Though rumors of a possible merger have swirled for years, analysts say the slump in business travel — which has led to increased competition for other travelers — might have prompted Frontier and Spirit to move forward.

“That challenges a go-it-alone approach for Frontier and Spirit, and probably helped spur a desire to enlarge their route networks and customer base while achieving more integrative efficiencies by combining,” said Kenneth Quinn, a partner at Clyde and Co and former chief counsel at the Federal Aviation Administration. “They’re no doubt trying to rationalize their aircraft fleet and network planning, and achieve greater economies of scale and scope like the larger U.S. airlines.”

Both carriers also announced quarterly earnings Monday. Spirit reported a fourth-quarter loss of $87.2 million, while Frontier reported a $53 million loss.

Executives with the two carriers said the merger would benefit consumers and employees at both airlines, creating jobs and possibly returning service to communities where carriers have exited. In a call with analysts, William A. Franke, managing partner of Indigo Partners — Frontier’s majority shareholder, who will become chairman of the combined company — called the announcement a “transformative moment” for the industry. Under the terms of the proposed merger, Frontier would control a 51.5 percent stake in the new company.

If approved, it would be the first merger among the nation’s airlines since Alaska Airlines announced it would acquire Virgin America in 2016. Before that, American Airlines and US Airways announced their intent to combine operations in 2013, which created the world’s largest air carrier.

Frontier pushes ahead with some success despite pandemic

The merger would mean the loss of a carrier in an industry where the top four airlines account for more than 80 percent of the market.

Justice set to approve merger of American Airlines, US Airways

The Biden administration in recent months has taken a closer look at consolidation in a number of industries. Last year, the Justice Department, which will review the proposed merger, filed suit challenging an alliance between American and JetBlue Airways that allows the carriers to sell each other’s seats on selected flights in the Northeast. The administration also has encouraged the Transportation Department to consider rules that would require airlines to refund fees when bags are delayed, or when services such as in-flight entertainment are offered but not actually provided.

The Justice Department had no comment on Monday’s merger announcement. Experts said the proposed merger will draw scrutiny but is unlikely to face significant obstacles.

Sam Weinstein, a professor at New York’s Cardozo School of Law, who previously was an attorney in the Justice Department’s antitrust division, said the government could take the view that “these are the two most important of the ultra low-cost carriers and we don’t want to see them merged, but I doubt that would happen.”

Quinn said while the Justice Department might be skeptical of large domestic carriers becoming larger or forming alliances, the department is unlikely to block the merger, in part, because they operate in leisure markets where large competitors have a significant share of business and entry barriers are relatively low.

The department initially opposed the merger between American and US Airways but dropped its opposition in exchange for concessions, including the relinquishing of some slots at Reagan National Airport to other carriers. It reviewed and ultimately allowed Alaska Airlines’ merger with Virgin America.

“They might ask them to give back certain things, although I think they would be hard-pressed to do so,” said Henry Harteveldt, an aviation analyst with Atmosphere Research. “These are airlines that are fighting to get in — in some cases, to airports — and have to limit their air service at certain airports because they just can’t get the gates.”

Harteveldt said the merger would create a more powerful low-fare competitor for American, Delta, Southwest and United.

“What will be interesting to see is if the ‘Big Four’ see the need to compete or simply say, ‘We’re willing to cede a certain part of the market to these carriers because we’d rather compete for a different type of customer,' ” he said.

Some consumer advocates questioned whether a merger would lead to improved service. While both carriers are known for cheaper fares, they have drawn criticism for charging for several services, including carry-on bags and printing boarding passes at airports.

“The bottom line is this: When two airlines whose business models are based on nickel and diming passengers merge, consumers should not expect that the result will be less nickel and diming,” said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumers League. “But at a higher level, I think what concerns me is it’s more consolidation.”

The Transportation Department said in a statement that it was informed Monday morning of the proposed merger and would provide assistance to the Justice Department as appropriate.

The Association of Flight Attendants-CWA, which represents more than 4,600 flight attendants at Spirit and 2,900 at Frontier, said its support for the deal would depend on its effects on members.

“Our first priority is to determine whether this merger will improve conditions for Flight Attendants just like the benefits the companies have described for shareholders and consumers,” the union said in a statement.

Executives for the two carriers said they expect the deal to close in the second half of this year if it meets various conditions, including the regulatory review process and approval by Spirit shareholders. Frontier’s controlling stockholder already has approved the transaction and related issuance of shares of Frontier common stock.

The name of the combined company, as well as its management team and corporate base, will be decided by a committee headed by Franke. When combined, the new airline could service more than 1,000 daily flights to more than 145 destinations in 19 countries, the carriers said.

Also Monday, the Federal Aviation Administration ordered a nationwide grounding of all Frontier flights because of what the company described as a “technology issue.” Frontier spokeswoman Jennifer de la Cruz said the problem was fixed by midday and the carrier was working to accommodate customers who were affected.