Wall Street sees mostly clear skies ahead for the potential merger of Frontier Group Holdings Inc. and Spirit Airlines Inc., with some regulatory hurdles in a business combination that would solve some staffing issues for the carriers and create the U.S.’s largest ultra low-cost airline.
Frontier ULCC, +3.39% and Spirit SAVE, +16.82% announced the merger agreement earlier Monday, valuing the cash-and-stock deal at $6.6 billion. The deal is expected to close in the second half of the year.
The combined airline would have a fleet of 287 aircraft and an order book of 354 aircraft, all Airbus SE AIR, +2.37% narrow-body jets, Jefferies analyst Sheila Kahyaoglu said in a note. That would be about 7% of the total U.S. fleet of narrow-body aircraft, she said.
The resulting airline “will create a more aggressive competitor to the Big 4 airlines, likely putting downward pressure on industry fares in an environment where U.S. domestic seats are expected to expand by 25% through 2024 from 2019,” she said.
Major regulatory hurdles wouldn’t usually be in the cards given the relatively small market share of each airline, which is around 8% of domestic U.S. seats on a combined basis, said analyst Savanthi Syth with Raymond James.
Due to the Biden administration’s approach to large corporations, however, “some objection” could be forthcoming, Syth said. Approvals needed include nods from the Justice and Transportation departments.
The Justice Department last year moved against American Airlines and JetBlue’s agreements over their Boston and New York operations, saying it would “harm travelers.” The airlines have sought to dismiss it, saying the complaint is without merit.
The Spirit-Frontier merger would also heat up speculation of additional airline mergers, with investors’ discussion most often swirling around about deals involving JetBlue Airways Corp. JBLU, +4.39%, Alaska Air Group Inc. ALK, +3.65%, and Hawaiian Airlines’ Hawaiian Holdings Inc. HA, +4.99%. But Monday’s announcement is unlikely “to spur additional combinations in the near term, Syth said.
Helane Becker with Cowen said that the potential merger would solve “a pilot crunch” hindering growth for both airlines.
They and other smaller, regional airlines have problems retaining pilots “as their mainline partners continue to hire from the farm team,” Becker said.
Spirit and Frontier would have to hire an estimated 5,000 pilots in the decade to fly their combined order book, and pilots “are the gating factor when it comes to growth,” the analyst said.
“We think the two companies will b e able to compete more aggressively with the larger airlines once they combine,” Becker said. “Consumers will have more choices as will communities. As it stands now, we expect small communities to lose service over the next few years as the pilot shortage becomes more acute.”
Both airlines also reported earlier Monday fourth-quarter results ahead of the merger news.
Frontier had a mixed quarter, reporting a narrower-than-expected loss on sales that were below Wall Street expectations. Spirit also reported a narrower-than-anticipated loss, but its sales beat estimates.
Frontier became public in March 2021 as a bet on a travel rebound as more people became eligible for the first vaccine shots in the U.S.
U.S. airlines have relied heavily on revenue from domestic and short-haul, “destination” international flights during the pandemic as travel restrictions and closed borders have plagued the often more lucrative trans-Atlantic flights, long-haul international flights, and business travel.
Shares of Spirit are flat in the past three months, while Frontier shares have lost nearly 17%. That compares with a retreat of around 4% for the S&P 500 index SPX, -0.01% and losses of nearly 17% for the U.S. Global Jets ETF JETS, +3.14% in the same period.