Frontier and Spirit to Merge, Creating Fifth-Largest Airline in U.S. in $6.6 Billion Deal

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  • Frontier Airlines and Spirit Airlines, the two largest ultralow-cost carriers in the U.S., have agreed to merge, creating what would become the fifth-largest airline in the country.
  • The company boards approved the deal over the weekend.
  • The deal, valued at $6.6 billion, is structured with Frontier Airlines controlling the merged airline and Spirit holding the remaining 48.5%.

Frontier Airlines and Spirit Airlines, the two largest discount carriers in the U.S., have agreed to merge in a deal valued at $6.6 billion, creating what would become the fifth-largest airline in the country.

The merger gives Denver-based Frontier Airlines a 51.5% controlling stake in the combined airline. Spirit investors will receive 1.9126 shares of Frontier plus $2.13 in cash for each share they own, giving Spirit shareholders an implied value of $25.83 per share, which is a 19% premium over the value of Spirit shares at the end of last week, the companies said.

"The transaction is centered around creating 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, CEO of Miramar, Fla.-based Spirit, told analysts on a call discussing the deal on Monday. "We believe we are a perfect fit with Frontier. Our businesses share similar values, including our long-standing commitment to affordable travel."

The boards of both companies approved the deal over the weekend. It would be the first merger of large U.S. airlines since Alaska Airlines' combination with Virgin America in 2016 and a test of the Biden administration's tolerance for consolidation, particularly among airlines, one of the most scrutinized industries by antitrust regulators.

Spirit's shares soared more than 17% after the deal was announced, closing at $25.46, while Frontier's ended the day $12.82 up 3.5%.

Frontier Chairman Bill Franke, a longtime discount airline investor and executive, will chair the combined company, which he said "will create America's most competitive ultra-low fare airline for the benefit of consumers."

The companies didn't announce the new name of the combined carrier, the CEO or location of the airline's headquarters. Those questions will be answered by a committee led by Franke after the transaction closes, which is expected in the second half of the year, pending regulatory and shareholder approval. Labor unions were informed early Monday, the airlines said. Pilots at Frontier and Spirit are represented by the same union, as are the two airlines' flight attendants.

The deal comes as carriers are still struggling to recover from the pandemic. Fast-growing discount airlines such as Spirit and Frontier that focus on price-sensitive leisure travelers have been able to weather the crisis better than their larger-carrier competitors, which are more reliant for revenue on international and business travel, two segments that have lagged in the recovery.

That has meant U.S. airlines large and small have been going after domestic leisure travelers, redrawing their networks in the process, to help dig themselves out of pandemic losses.

For Franke, the deal is the latest in a career of making investments in and overseeing low-fare airlines around the world, including Spirit. His empire of ultralow-cost airlines includes Hungary's Wizz Air, Chilean carrier Jetsmart and Volaris in Mexico.

From 2006 through 2013, Indigo Partners held a stake in Spirit, with Franke serving as chair of the airline before he resigned when Indigo sold its position in the carrier. Shortly after that move, Indigo bought Frontier Airlines from Republic Airways for $145 million.

Since that acquisition, Frontier has steadily expanded its route network with new destinations and additional flights, often targeting cities where larger airlines such as Southwest have a strong presence. In almost every case, Frontier enters with low fares to gain a foothold with price-conscious travelers.

Known for its bright yellow planes, Spirit has also been aggressively expanding in the last decade, including in much larger rivals' hubs, and plans to continue that strategy once it combines with Frontier. The two airlines had been having deal talks "in earnest" since late last year, Christie said.

The two carriers overlap on about 520 of more than 2,800 routes, according to aviation data and consulting firm Cirium.

"Spirit is very strong in the East. Frontier is very strong in the West," Biffle told analysts on a call discussing the deal. "That's going to drive more customers onto our existing flights, which means more low fares to more people."

The carriers said the deal would allow them to continue growing and that they plan to add 10,000 new jobs by 2026. Frontier said it doesn't expect there to be any furloughs and told its flight attendants that it anticipates "maintaining all of our current bases and growing them over time."

The tight labor market has challenged airlines' recovery plans in the pandemic.

"It makes a lot of sense and the opportunity has been ripened by the demand patterns of the pandemic," said Samuel Engel, senior vice president at consulting firm ICF.

In 2013, Spirit and Frontier had 2.8% of the revenue passenger miles flown by U.S. airlines, according to the Department of Transportation. By 2019, their combined market share had almost doubled to 5.4% while the four largest airlines in the U.S., American Airlines, Delta Air Lines, United and Southwest, controlled 73.9% of revenue passenger miles.

With both carriers flying only Airbus planes and neither dominating one particular market, a Spirit-Frontier merger makes sense on paper. Still, the Biden administration has made it clear to corporate America it will scrutinize potential mergers far more aggressively than the Trump administration did.

In September, the Justice Department sued to block a partnership in the Northeast U.S. between American and JetBlue, arguing it would reduce competition and drive up airfares. The two carriers have denied that and said the alliance, which went into effect last year, allows them to better compete against Delta and United in congested markets such as New York, Boston, and Newark, New Jersey.

"In a normal environment we would not expect any regulatory hurdles, but given the Biden Administration's 'big is bad' approach that has led to DOJ lawsuit against what appears to be a pro-competition Northeast Alliance by American and JetBlue, we would expect some objection," wrote Savanthi Syth, airline analyst at Raymond James.

Other analysts, however, were optimistic that the deal would be approved.

"We believe the proposed transaction will be approved by regulators given the minimal overlap of route networks and the fact that it is likely to be viewed as proconsumer," Deutsche Bank airline analyst Michael Linenberg said in a note.

Cowen's Helane Becker said she expects the deal to get approved eventually.

"I think this deal can get done, but that doesn't mean there isn't going to be a lot of regulatory questions that have to get answered," she said.

— CNBC's Kevin Stankiewicz, Meghan Reeder and Nate Rattner contributed to this article.

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