By Rajesh Kumar Singh and Aishwarya Nair
CHICAGO (Reuters) -Budget carriers Frontier Group Holdings and Spirit Airlines (NYSE:SAVE) Inc on Monday unveiled plans to create the fifth-largest U.S. airline in a $2.9 billion tie-up likely to tighten competition against traditional carriers.
The proposal to form a new no-frills carrier controlled by Frontier Airlines pushed up shares of Spirit as much as 18.7%, though several analysts pressed the airlines over possible difficulties in obtaining regulatory approval.
"In a competitive industry like ours, the lowest costs always win," Frontier Chief Executive Barry Biffle told analysts. "These low costs will, in turn, enable us to keep our fares low for customers."
The move comes at a time when the U.S. airline industry is grappling with volatility in travel demand due to new COVID-19 variants. At the same time, costs are soaring on a combination of rises in wages, fuel prices and airport charges.
Spirit's wage expense as a percentage of revenue shot up by more than 10 points last year versus 2019. Higher fees prompted Frontier to exit airports such as Los Angeles and San Jose in California, and stop serving Washington-Dulles and Newark.
The merger, which is expected to close in the second half of 2022, is projected to result in synergies of $500 million a year, mainly through operational savings.
The companies pledged to avoid any job losses and add 10,000 direct jobs by 2026. They also promised the merger would deliver $1 billion in annual consumer savings and offer more than 1,000 daily flights to over 145 destinations.
Peter McNally, global sector lead for industrials, materials and energy at research firm Third Bridge, said cost pressure is the biggest threat to recovery in the airline industry's profit.
The merged company would be in an "excellent" position to combat rising operating costs, McNally said.
ANTITRUST HURDLE
But some analysts warned the deal could face opposition from the White House as U.S. President Joe Biden's administration takes a tough stance on big corporate mergers.
The Department of Justice (DOJ) declined to comment on the merger proposal. A White House spokesperson did not comment on the proposal but said the administration "is committed to protecting competition across a wide range of industries for the benefit of consumers."
The DOJ has filed an antitrust lawsuit https://www.reuters.com/business/aerospace-defense/us-preparing-challenge-american-jetblue-partnership-wsj-2021-09-21 against American Airlines (NASDAQ:AAL) Group Inc and JetBlue Airways (NASDAQ:JBLU) Corp over their partnership, alleging it would lead to higher fares in busy Northeastern U.S. airports.
Biffle acknowledged the Frontier-Spirit deal would require DOJ approval but predicted it would be "well received" by regulators because it would lead to "low fares to more people in more places".
Data from Cirium, an aviation data company, shows the two carriers overlap in only 18% of their routes.
Shares of Spirit Airlines closed up 17.2% at $25.46. Frontier's shares ended the day with a gain of 3.5% at $12.82.
Renowned airline investor Bill Franke, a pioneer of rock-bottom fares coupled with top-up charges offered by ultra low-cost carriers (ULCC), will be chairman of the new airline, whose brand name and CEO have not been announced.
Franke's private equity firm Indigo Partners, which is Frontier's majority shareholder, had previously invested in Spirit which was once considered a suitor for Frontier.
Ultra low-cost carriers are a tier below Southwest Airlines (NYSE:LUV), which pioneered the low-cost concept in the 1970s, and they have continued to expand https://www.reuters.com/article/us-airlines-usa-lowcost-focus-idCAKBN2AU1N0 during the COVID-19 pandemic.
The companies expect the deal to accelerate investment and help take on major U.S. airlines like American, Delta Air Lines (NYSE:DAL), Southwest and United Airlines Holdings (NASDAQ:UAL).
The merger would be worth $6.6 billion including the assumption of net debt and operating lease liabilities.
Colorado-based Frontier would own a 51.5% stake in the combined entity.
Under the cash-and-stock deal, Spirit's shareholders would receive $25.83 per share, a premium of 18.8% to Friday's close.
Both airlines use Airbus SE (OTC:EADSY) jets and signaled they were not looking at cancelling airplane orders.