Frontier Group, the parent company of Frontier Airlines, announced Monday that it will buy discount rival Spirit Airlines to better compete with mainline carriers. SAVE stock jumped while ULCC stock rose modestly.
The deal will create the No. 5 airline in the U.S., Spirit equity holders will receive 1.9126 shares of Frontier plus $2.13 in cash for each existing Spirit share they own. That was equal to $25.83 per Spirit share as of Friday's close, but $26.50 as of Monday's close.
The transaction values Spirit Airlines at $2.9 billion, but the deal is valued at $6.6 billion when accounting for the assumption of net debt and operating lease liabilities.
Frontier shareholders will own approximately 51.5% of the combined airline. Spirit shareholders will own approximately 48.5%. Frontier also will have a narrow majority of the combined carrier's board of directions. The new company is expected to have annual revenues of approximately $5.3 billion based on 2021 results.
The airlines said the deal will "create America's most competitive ultra-low fare airline for the benefit of consumers" and would offer travelers more destinations options in the U.S., Latin America and the Caribbean.
The merger should close in the second half of the year. A name for the airline and new branding will be determined prior to the deal's close.
Moody's Senior Vice President Jonathan Root said the deal would be "credit positive," noting that prior airline mergers offered "competitive benefits of a more concentrated industry and increased focus on earning profits and acceptable returns on capital instead of market share."
But the deal could face regulatory hurdles for that very reason. But the Biden administration has signaled it will review mergers more closely than the Trump administration, with industry consolidation and reduced competition key concerns.
A wave of consolidation swept mainline carriers following 9/11 and the Great Recession. The impacts of Covid-19 have hit airlines hard as business travel has yet to return and travel restrictions have impacted international flights.
Meanwhile, Frontier Airlines flights were briefly grounded Monday due to automation issues.
Frontier shares rose 3.5% to 12.82 on the stock market today. Spirit soared 17% to 25.37.
Frontier Earnings
Frontier also announced fourth-quarter results Monday. The carrier reported a loss of 24 cents per share, less than the 32 cents-per-share loss FactSet analysts expected. Revenue was $609 million, under analyst expectations for $642.4 million.
Frontier operated an average of over 450 flights per day in Q4, up 10% vs. Q4 2019. Total revenue per passenger during the quarter was approximately $103.
The carrier ended 2021 with a total fleet of 110 aircraft. It has a massive Airbus order in the works with 91 additional A321neo aircraft are slated for delivery between 2023 and 2029.
Frontier and Spirit only fly Airbus jets, making it easier to combine operations.
Spirit Airlines Earnings
Spirit Airlines lost 64 cents a share adjusted, beating views by 23 cents. Revenue shot up 98% to $987.6 million, better than expected.
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