Frontier Airlines tried to buy Spirit. JetBlue came in with a bid that significantly overpaid. Spirit shareholders began getting payments for the stock under that deal, even though it never closed. The Department of Justice blocked it, leaving Spirit on the verge of bankruptcy.
Spirit has just pushed off a debt restructuring deadline with Visa and Mastercard to December 23rd. The requirement to refinance $1.1 billion in bonds or lose the ability to process credit card transactions next year had already been extended from September to Monday of this week.
Now Spirit and Frontier are back in merger talks. Any deal would likely take place as part of a pre-packaged bankruptcy.
It’s a different environment for ultra low cost carriers than it was when Frontier tried last time to buy Spirit. Pre-pandemic these were the most successful airlines in the country. Now the model is struggling.
- Labor costs are up significantly
- They pay the same for fuel as everyone else
- Customers preferences have shifted to be willing to pay more for a better inflight experience, which both Spirit and Frontier have recognized by re-bundling their products and selling more premium offerings themselves.
Acquiring planes and pilots to grow capacity seems like a questionable strategy for Frontier right now. They have struggled with profitability and have been trying to find places to fly their planes. Mergers are expensive and distracting at a time when Frontier’s economics are already under pressure. So it’s not obvious that this is a good move for Frontier.
However it would be far harder for the Department of Justice to block the deal with Spirit actually in Chapter 11. Already the administration’s anti-trust policy with airlines has had the opposite effect they’ve claimed to want. Blocking JetBlue-American has strengthened the largest players in New York, eliminating competition. Blocking JetBlue-Spirit hasn’t strengthened the ultra low cost market, it’s pushed Spirit to restructuring. Requiring Alaska Airlines to maintain capacity between the Hawaiian islands could push Southwest further out of the market and raise fares. Letting the two troubled low cost airlines combine would arguably strengthen that sector relative to the legacy airlines.
Frontier is the true ultra-low cost carrier in the U.S. today. While Spirit is introducing real domestic first class, Frontier merely sells customers access to a blocked middle seat. Frontier still won’t offer wifi for sale. And they continue to do flight attendant training at a truck stop in Wyoming, because it’s cheaper than closer to their Denver headquarters. Of course, Frontier is controlled by Bill Franke who earlier turned Spirit into a low cost carrier and run by Barry Biffle who had been Spirit CEO Ben Baldanza’s right hand (and had worked with Baldanza at US Airways).
Even if you don’t fly the two airlines, Frontier plus Spirit means a stronger airline flying more planes under an ultra low cost carrier model. That’s capacity charging lower fares driving down the prices that United, American and Delta can charge.
I rarely fly these carriers. Spirit isn’t in my market, and Frontier rarely suits my plans. But I agree it’s of value to everybody to have a low-priced carrier in a market for the impact it has on the others. I’m sure my flights to Denver on United are cheaper because Frontier also flies there. In any case, it looks like the DOJ isn’t doing a good job if its aim is to maintain healthy carriers and competition.
As an economist, I understand the perspective of the DoJ. But there is a limit to the number of carriers that can profitably serve any given market. Since nothing stops someone with some financing from starting an airline, it’s important either to allow airlines to go bankrupt or merge with existing carriers. To some extent, LCCs and ULCCs operate in a different market than legacy carriers (not really sure which market Southwest belongs in). But there is still a capacity constraint. And it is not to the benefit of the flying public to have frequent bankruptcies in the sector; there are usually passengers holding tickets who are inconvenienced, etc.
the oft-repeated trope about the DOJ and its opposition to airline mergers or deals is simply not based in reality.
AS/HA just pulled off an end-on-end merger of two legacy carriers where one was distressed but not in chapter 11 even though there was significant overlap in a competitive market – Hawaii.
The DOJ opposed TWO deals involving B6 – both of which were blatant attempts to limit competition by removing a lower cost competitor (NK) and the other trying to do through a partnership what is only allowed with foreign carriers or via a merger.
F9-NK made sense years ago and still does.
Tim:
Amen! Not every merger is a good merger just because the two companies say so.
I know the comment “Blocking JetBlue-Spirit hasn’t strengthened the ultra low cost market, it’s pushed Spirit to restructuring” is meant to be a criticism, but I see the blocked merger as a good thing. NK will most likely merge with a partner that makes sense…F9.
The question is can the ULCC business model be sustainable long term. It has nothing to do with “giving Americans low fares” and everything to do with is the business model profitable. Not sure putting together two drunks will get you one sober person.
Seems that the ULCC carriers are trying to become an updated version of the ULCC with an appeal to people looking not be treated like watermelons in the back of a farm truck. Time will tell if they can pull this off.
If Frontier and Spirit merge, I can see them moving somewhat up from the current ULCC mode. They will be able to do it because of the lack of competition at the low end of ULCC. The combined operation will have enough market share to compete with the big four and other airlines for the low budget travelers. The low end ticket price will rise somewhat.
@ Gary — Great, this would ruin Spirit, just when I was liking them.
Realistically its the only only forward for both of them to remain a going comcern….risky or not. Option 2 for is sell planes & delivery slots for airlines burned by Boeing stupidity. If this dosent work out (50/50) there’s always option 2.
jns,
all fares will move up for all business types in part because there will be less capacity and also because there will be less need to be the absolute bottom feeder.
This could be the merger along w/ what is taking place at WN that pushes the entire industry either into sustained decent profitability or weeds out the carriers that chronically underperform and will have to shrink or take more aggressive means to improve their profitability.
Personally I could see Southwest coming in at the 11th hour with a bid for Spirit. They are a hot mess right now but they could retake FLL as a solid LATAM hub, have a good presence at DFW and a “first class light” product all day one and those are all things they really need right now.
I hope this merger doesn’t happen. That would leave the United States with one major ULCC, which would allow most of the other majors to charge mortgage prices for fares. Some people aren’t doing as well as some the upper middle class folks posting on this site. Europe is so lucky to have both Ryanair and eastJet.
@ Tim — WRONG, dude. Less people will fly, prices are not going to rise. Dream on.
I support the merger. It’s simpler to avoid one ULCC than two of them.
Totally Disagree. Anytime a company is eliminated through a “merger” there is ALWAYS price increases, shutdowns, fewer choices, and the slaughtering of employees. Always. Fact. Allowing Frontier to eliminate Spirit will positively double Frontier fares. At least double. All that will do is eliminate a competitor. The legacy carriers will not feel any pressure simply because Frontier will raise the prices. Allowing one low cost carrier to disappear will certainly help the big carriers. But let’s call this spade a spade — allowing Frontier to eliminate Spirit through a ‘merger’ is all about killing Spirit and has positively nothing to do with preserving the industry. Promises are always made but NEVER followed through on with any merger ever in history.
Look at the most recent big ‘merger’ – Sprint being eliminated by T-Mobile. Tmobile “promised” to be jobs positive from day one and every day thereafter. They promised more jobs combined than they would have separate. As individual companies they had a combined over 80,000 employees. Today they have less than 65,000. They promised not to raise prices. They did. Then did again. And again. AT&T did this same thing when they ‘merged’ with Cingular back in the day. The day after the merger closed 10,000 pink slips went out. Prices climbed.
There is no merger in history that is good for any employee or customer. It ALWAYS means higher prices and less competition. These two airlines went after the greyhound bus traveler. That worked for a good while. But the market has changed. Spirit is trying to change and adapt to the market. Good for them. Frontier simply wants to eliminate a rival and increase prices as there will no real competition in this space.
So let’s not say this is good for the industry. It’s good for stock holders perhaps. But for the flying public this is definitely not good and is horrible for the employees as well. Nothing good will come from the elimination of one of these carriers. They need to grow up and figure out how to adapt which Spirit is trying to do. I wish Spirit well with their new strategy.
I fly Frontier often and have earned status and usually have normally positive experiences with them. I avoid Spirit and don’t like their new pricing or setting package structure. So I would like to see Frontier merge them and expand. I see them having to use Spirit planes and seating to have more options but see base pricing staying lower. So those out there needing bare bones will still be served. I do hope the DOJ or whomever makes them use Spirit personal items boxes. Frontier doesn’t hassle me on it but it is a scam.
I fly Frontier often and am thankful I have not had any negative experiences many people talk about. I have had some delays, but no canceled flight. Even if I did, that is on all airlines. All my experiences have been positive and I hope Frontier and Spirit merge.
From a big picture corporation perspective, this may seem like a good idea. However, making something bigger isn’t always better. Spirit got themselves on the verge of bankruptcy. Frontier’s inner workings have their employees struggling to even make enough money to live and on the verge of striking. Both companies are struggling with profitability. Merging two struggling companies is a bandaid fix to problems they can’t solve with their current management teams
I work for frontier. Just like any airline, I see our management make costly mistakes on a regular basis. ULCC allow families to travel that might not be able to, which i am all for. The problem right now is there is to much downward pressure on ticket prices. A larger airline will certainly equal less jobs and higher prices, which unfortunately is what both airlines need. It will allow the ULCC market to truly compete with the legacy airlines and hopefully to adapt and improve their product. I am also Hopeful that it will attract a management team that can actually do the job and create a successful company, rather then enrich themselves. In the end if the debt of spirit is made manageable, I am all for a combined spirit frontier, but for their employees I would hope southwest buys them (they won’t, they don’t have the money for it)