Discounter Frontier Group Holdings (ULCC -0.84%) is making a move to join the upper echelon of U.S. airlines, announcing plans to combine with Spirit Airlines (SAVE -0.28%) in a deal valued at $6.6 billion.
The combination would create the nation's fifth-largest airline, with a large presence in tourist destinations across the Sun Belt, a hub in Denver, and flights throughout the Caribbean and Latin America. Together Frontier and Spirit account for about 7.5% of United States total seats.
Image source: Frontier Airlines.
What the deal means for Frontier investors
Investors should know the Frontier/Spirit deal is subject to regulatory and shareholder approval, and will not close until the second half of 2022. Frontier shareholders would hold about 51% of the combination, with Spirit shareholders set to receive 1.9126 shares of Frontier and $2.13 in cash for each share they own.
For Frontier, the deal announcement is the start of a long, and potentially difficult, period of integrating two airlines into one. Both companies are heavily unionized, and airlines in the past have had to sweeten pay and benefits in order to facilitate the merging of pilot unions and other groups and to avoid work stoppages.
In this case, both Spirit and Frontier are facing the risk of pilot shortages and pay rates were likely headed up anyway. The combination will have more flexibility when it comes to scheduling, and the deal should help solve a potential pilot crunch.
What the deal means for Spirit investors
Spirit shareholders are getting the best of both worlds in this deal: a partial cash payout and the opportunity to hold stock in the combination and benefit from the upside if Frontier gets the integration correct. The deal offers a premium of nearly 19% to Spirit's Friday closing price, but that premium will adjust along with Frontier's share price in the months to come.
Spirit has been one of the fastest growing airlines in the United States, but the company has had trouble keeping up with the demand and has faced operational hiccups due to staffing shortages and bad weather events. Combining with Frontier would diversify the network, adding a strong West Coast presence, and with size should create a more stable operation.
Should you buy Frontier stock today?
It will be nine months or so before the deal closes, and the given considerable risk that comes with integration, there is no rush to buy Frontier shares immediately. But there is enough potential upside here for existing holders of both Frontier and Spirit to remain on board and for long-term minded investors to at least give Frontier a look.
Although Spirit and Frontier both routinely rank poorly in terms of customer complaints, their low-fare, no-frills model has allowed them to gain marketshare. This deal would allow management to apply what they have learned over a much broader base. Once they fly through the turbulence that comes with merging two airlines, the combination should have some of the best potential for growth in the U.S. airline industry.
