US low-cost carrier Frontier has agreed to acquire rival Spirit for $6.6bn, including net debt, in what would be the first large airline merger since the industry was rocked in 2020 by travel bans and lockdowns introduced to stem the spread of Covid-19.
Under the terms of the agreement on Monday, Spirit shareholders will receive 1.9126 shares of Frontier plus $2.13 in cash per Spirit share. At a $25.83 per share valuation, Spirit shareholders will be paid a 19 per cent premium over the stock’s closing price on February 4.
If the deal is approved, the new company will be 51.5 per cent owned by Frontier, while the remainder will be held by Spirit.
Frontier and Spirit said that the combination would allow them to better compete with the “Big Four” airlines — American, Delta, Southwest and United — claiming they would lower costs further for consumers and also expand services to underserved, and usually more expensive, routes.
“This transaction is centred around creating an aggressive ultra-low fare competitor . . . and increase competitive pressure, resulting in more consumer-friendly fares for the flying public,” said Ted Christie, president and chief executive of Spirit. “We look forward to uniting our talented teams to shake up the airline industry.”
Air travel continues to recover from the pandemic. In 2021, almost 580mn people passed through US airport security checkpoints, according to a Financial Times analysis of Transportation Security Administration data. That is still down from more than 840mn checks in 2019, before the pandemic, but represents an 80 per cent increase from about 320mn in 2020 when state and city lockdowns and the absence of Covid vaccines prompted people to avoid air travel.
The combination, which the two companies said they hoped to close in the second half of 2022, is likely to be thoroughly scrutinised by antitrust regulators, who have in recent years been sceptical about airline mergers.
Lina Khan, chair of Federal Trade Commission, and Jonathan Kanter, head of the justice department’s antitrust division, have both recently said that they would take an aggressive stance on blocking deals.
Khan has been particularly critical about consolidation in the airline industry. Her attacks, however, have been predominantly targeted at the Big Four, which according to her calculations control about 80 per cent of air travel in the US.
“The high level of concentration has handed the four companies enormous market power, equipping them to keep fares high even as oil prices have plummeted,” Khan wrote in the Washington Post in 2015.
She added: “The quality of their service, meanwhile, continues to deteriorate, with less seat space, fewer flight options and a litany of fees for basics that used to be free, such as checked bags and in-flight snacks. The situation, in other words, bears classic signs of oligopoly.”
Frontier and Spirit are likely to use Khan’s previous arguments to make a case in favour of the creation of a larger budget carrier that can compete against the existing top players. The last large airline merger to be cleared by the DoJ was in 2016 when Alaska Airlines bought Virgin America for $4bn.