Frontier backs down and will charge more, but not for extra chair 0:29
New York (CNN Business) --
Spirit Airlines and Frontier Airlines announced Monday a $6.6 billion merger, a combination of low-cost carriers that would create America's fifth-largest airline.
The companies have not yet said what brand they will fly under or who will lead the management of the new airline.
The combined carrier would offer more than 1,000 daily flights to more than 145 destinations.
The new airline would overtake JetBlue and Alaska Air in the number of miles flown by paying passengers, according to 2021 statistics, putting them behind the top four carriers that control about 80% of the country's air traffic: American, Delta United and Southwest Airlines.
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"This transaction is focused on creating an aggressive ultra-low rate competitor to further serve our clients, expand career opportunities for our team members and increase competitive pressure, resulting in more favorable rates for the flying public," said Spirit CEO Ted Christie.
According to aviation analytics firm Cirium, out of a combined 2,832 routes, the two airlines currently cover only 519 routes.
That equates to 18% of its routes, suggesting the combination will have limited impact in reducing competition for passengers.
Like most of the US airline industry, Spirit and Frontier have suffered losses in the last two years due to the drop in air travel during the pandemic.
On Monday, Spirit reported a 2021 loss of $440.6 million, excluding special factors such as federal aid that went to all US airlines.
This was an improvement over the $719.6 million it lost on this item in 2020. Frontier reported that it lost $299 million on this in 2021, about the same as in 2020.
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But the combined revenue of the two airlines in the fourth quarter was down just 2% from their combined revenue in the last three months of 2019. That's much closer to pre-pandemic levels than the top four carriers.
Much of that is due to the fact that they rely primarily on leisure travelers, not business passengers, who have been slower to fly again.
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Low fees and low approval
The combination would bring together two airlines that have very low base fares but charge passengers extra for most things, including hand luggage.
Although their passengers like the low fares, many do not like the experience of flying on these airlines.
Spirit is by far the company with the most passenger complaints, with 13.25 complaints per 100,000 passengers, according to January-September 2021 statistics from the US Department of Transportation.
JetBlue was the second company with the most complaints, with 6.85, while Frontier was the third in the sector, with 5.76.
Frontier had by far the worst complaint rate in the same period in 2020, when it registered 60.24 complaints per 100,000 customers.
Frontier and Spirit also had the worst customer satisfaction ratings in the industry, according to the US Customer Satisfaction Index.
Frontier suffered some service problems on Monday morning, shortly after announcing the planned merger.
A technological problem caused the temporary suspension of all its flights, according to the FAA.
The airline's statement says the problem was quickly fixed.
"Earlier today, we experienced a technology issue that caused some flight delays and cancellations," it said in a midday statement.
"The issue has been identified and resolved. We are working to reset our flight schedule for the remainder of the day."
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Regulatory obstacles
It remains uncertain whether the merger will be approved by federal antitrust regulators.
The Biden administration has taken a much more aggressive approach to antitrust issues.
He recently blocked an alliance between American and JetBlue that fell short of a full merger.
Increasing competition in the airline industry is one of the issues the administration has cited as a priority.
Executives involved in the proposed Spirit-Frontier deal say they believe the merger will bring more competition to the industry.
"This is the kind of transaction that management should support," Bill Franke, Frontier's chairman and managing partner of Indigo Partners, Frontier's majority shareholder, said in an interview Monday on CNBC.
"It's good for consumers. It's good for employees. It's good for the communities the airlines serve. And at the end of the day, even combined, these two airlines will control less than 10% of the market."
But experts aren't sure regulatory approval will be as easy as airlines hope.
"In a normal environment we wouldn't expect any regulatory hurdles given each airline's relatively small market share. But given the Biden administration's 'big is bad' approach, some objection might be expected," said Savanthi Syth, airline analyst at Raymond James.
The US airline industry has been extensively changed by mergers in the last 25 years.
Today's four largest airlines were formed from a series of mergers of 10 airlines.
This would be the first US airline merger since Alaska Air acquired Virgin America in 2016.
The US$6.6 billion value of the deal includes assumed debt as well as aircraft leases.
The value of the shares and cash being exchanged would be $2.8 billion, based on Friday's closing price.
Frontier would be the purchasing airline in this transaction, as Spirit shareholders would receive 1.9126 Frontier shares plus $2.13 in cash for each of their shares.
This would represent a premium of approximately 20% over Friday's closing price.
However, Spirit's shares are only up 13% in midday trading, while Frontier's are little changed, suggesting investor uncertainty about the deal's conclusion.
Merger of companiesSpirit Airlines