Laser1987/iStock Editorial via Getty Images Frontier Group Holdings ( ULCC ) started the week off with a bang, announcing that it will be acquiring rival airline Spirit ( SAVE ).
The deal will be valued at roughly $2.9 billion in cash and stock and is close to being a merger of equals. Frontier shareholders will control 51.5% of the combined company, with existing Spirit shareholders owning the other 48.5%.
This is a deal that makes a lot of intuitive sense. Both are ultra-low cost carriers primarily focused on leisure travelers. Both fly Airbus ( OTCPK:EADSY ) fleets, making it easier to integrate their planes and keep maintenance costs in check. And the airlines have fairly different coverage areas, so there won’t be too much geographic overlap. Frontier is primarily focused on the West with flights out of its central base in Denver, whereas Spirit is centered in Florida. Frontier: A Bumpy History
This deal comes as something of a surprise. Perhaps my bias is showing here as I lived in Colorado, Frontier’s home market, for many years. However Frontier has a reputation for being a struggling carrier that has had difficulty maintaining a consistent strategy.
Frontier launched in the 1990s aiming to bring low-cost service to the West. However, Southwest ( LUV ) ultimately entered the Denver market, making it a three-carrier city. Frontier didn’t have the financial resources to stick it out and had to file bankruptcy in 2008.
Republic Airway Holdings ultimately bought Frontier and revived it. However, they also bought Midway, another smaller carrier, and attempted to merge the two. This created all sorts of confusion, as they operated much different fleets with very different amenities, yet they intermixed planes from each to meet demand. Frontier ultimately ended up shuttering most of Midway’s operations.
A few years later, Republic attempted to spin-off Frontier, and ultimately sold it to Indigo Partners, a private equity firm. That was just in time, as Republic itself would go bankrupt in 2016. Indigo, meanwhile, realized that Frontier’s existing hybrid low-cost model wasn’t quite working. So it overhauled things, reshaping Frontier as an all-in ultra-low cost carrier eliminating things such as toll-free telephone customer service.
Frontier would ultimately go public again last year, completing the IPO of its ULCC stock at $19/share. Investors haven’t gotten off to a smooth ride this time, either, as ULCC stock has been a poor performer since IPO: Data by YCharts A Disappointing End For Spirit
Knowing that backstory, I was surprised to hear Frontier would be the acquiring airline. Spirit has developed a reputation for being one of the better-run airlines out there from a financial perspective. Yes, Spirit’s customer service may be lousy. But operationally, some analysts held Spirit up as a potential next Southwest — that is to say — a rare airline that could consistently make money despite the industry’s brutal economics.
And, yet, at the end of the day, Spirit appears willing to sell itself to another not particularly distinguished discount carrier near a 10-year low in SAVE’s stock price. Not great.
Frontier intends to pay $2.13 per share in cash plus 1.9126 shares of ULCC stock for each outstanding share of Spirit. This would add up to $25.83 based on Friday’s closing price. However, Frontier stock has slipped following this announcement along with its quarterly earnings. As I’m typing this, ULCC stock is trading around $12.00 even in premarket, which would put the consideration closer to $25.08 per SAVE share.
Now here’s a 1-year chart of SAVE: Data by YCharts A takeover in the $25 range simply isn’t too rewarding for most investors that bought during the past 12 months. You’d hope to get a little more for your loyalty if you stuck with Spirit shares during its difficult time recovering from the pandemic. Prospects For The New Firm
So will the combined Spirit and Frontier become a major power player in the industry? In 2019, prior to the pandemic, the two airlines combined had 5.4% market share in the U.S. overall. That’s not nothing, but it’s not in the same tier that would give the major legacy carriers or Southwest a real run for its money.
Arguably, the easy growth for ultra-low cost carriers is already mostly tapped out. Spirit managed to grow revenues four-fold between 2011 and 2019. It did this primarily by creating new market demand with its pricing structure. The typical Spirit customer wasn’t someone defecting from American ( AAL ) but rather a person that wouldn’t have traveled at all before or would have taken alternative […]
source Frontier Buys Spirit, Reminds Investors That Airlines Are Hard
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