Frontier Airlines Inc. and Spirit Airlines Inc. plan to partner to create a low-cost “disruptive airline” that will deliver consumers an estimated $1 billion in annual savings. Shares of other major U.S. airlines — the same carriers such new competition would likely disrupt — rallied on Monday, February 7, on the news. Something is wrong with this image.
Frontier Group Holdings Inc., the parent company of Frontier Airlines, is offering a combination of stock and cash to Spirit holders worth $25.83 based on last week’s closing prices. This implies a transaction value of approximately $6.6 billion, including debt assumption and an acquisition premium of approximately 19%. The deal makes a lot of sense for the companies, both of which are major carriers at Cleveland Hopkins International Airport.
William Franke, chairman of Frontier and managing partner of its largest shareholder, private equity firm Indigo Partners, previously served as head of Spirit’s board and played a key role in the airline’s turnaround. Both carriers primarily target leisure travelers. This market has rebounded quickly in the United States, but competition is fierce as traditional carriers revamp their networks to capture more demand and new entrants take advantage of cheaper aircraft prices. A major airline may also be better able to compete for talent in a tight labor market, note Bloomberg Intelligence analysts Francois Duflot and George Ferguson.
Whether antitrust regulators will be as enamored of the merger is another matter altogether. Frontier and Spirit are clearly working to portray this agreement as a win for consumers, regional travel and the economy in general. The deal will result in “even more ultra-low fares to more places,” the carriers said in a statement. Estimated annual savings of $1 billion for consumers are based on expectations for new routes and more efficient use of aircraft. That math seems a bit more squishy than the normal corporate cost benefits depicted in takeovers, but this is the first time in a decade of M&A coverage that I can recall companies even attempting to quantify the dynamic consumers.
Investors seem to have concluded, however, that the biggest beneficiary of this deal could be the airline industry itself. US airlines have ordered swathes of new planes – including a blockbuster deal for 255 narrow-body Airbus SE planes announced in November by Frontier and other low-cost carriers that count Indigo as their largest shareholder. Much of this new capacity is targeting the more robust leisure market, putting pressure on fares just as inflation rears its ugly head. The Frontier-Spirit rapprochement can be read as a sign that more disciplined heads prevail. That could ease concerns about the long-term profitability of the domestic travel market, Deutsche Bank AG analyst Michael Linenberg wrote in a note.
The sheer volume of deals announced over the past year limits the ability of the Federal Trade Commission and the Department of Justice to challenge every deal they believe might warrant it. But it’s unlikely that a merger between two US airlines – which the average domestic traveler has probably heard of, even if they haven’t flown directly with them – in an industry that has received tens of billions dollars in government aid during the pandemic is flying under the radar.
While the Biden administration has pledged to toughen the deals generally, it has so far focused primarily on industries that are already heavily consolidated and of particular importance to national security and the economic competitiveness of states. United. For example, the FTC filed a lawsuit to block Lockheed Martin Corp’s $4.4 billion takeover. rocket booster maker Aerojet Rocketdyne Holdings Inc. as well as Nvidia Corp’s $40 billion deal. for the British semiconductor company Arm Ltd. If the airline industry was big enough in the United States to warrant billions in pandemic aid, it’s big enough to deserve a tough antitrust stance.
Indeed, the Biden administration has previously signaled that it would be skeptical of further airline tie-ups. The Justice Department sued in September to force American Airlines Group Inc. and JetBlue Airways Corp. unravel a marketing alliance that allows them to book travelers on each other’s flights and link their rewards programs. The regulator cannot allow further consolidation in an industry “where competition is already critical,” said Richard Powers, who was the acting assistant attorney general for the Justice Department’s antitrust division, at the time. Recall that the Department of Justice filed a lawsuit in 2013 to block the merger between AMR Corp. and US Airways Group Inc. before finally reaching a settlement that allowed the agreement that created the current American Airlines to continue.
The regulator allowed the two largest aircraft lessors, AerCap Holdings NV and the GECAS arm of General Electric Co., to consolidate last year. This agreement prompted this memorable comment from Alexandre de Juniac, the former head of the International Air Transport Association: “You have two aircraft manufacturers, you have two or three big (equipment manufacturers), monopolistic air traffic control, monopolistic airports and now we have monopoly backers. Lovely.”
Indeed, one has to go back to the early 2000s to find examples of large aerospace mergers that were successfully blocked by the United States on antitrust grounds, according to data compiled by Bloomberg. For better or worse, however, low-cost airlines are simply a much more visible and controversial industry than aircraft leasing or aerospace manufacturing. Antitrust regulators are unlikely to look elsewhere on this Frontier-Spirit combination.