Spirit Airlines and Frontier are back in merger talks with a deal that could be completed this month – but that isn’t done yet, so could still fall apart.
Bankrupt Spirit Aviation Holdings Inc. is in discussions to merge with Frontier Group Holdings, people familiar with the matter said.
A transaction could be announced as soon as this month, said the people, who asked not to be identified because the matter is confidential. The discussions are ongoing and could end without a deal taking place, they said.
Spirit and Frontier originally announced an agreement to merger in February 2022. JetBlue then outbid Frontier, the Biden administration blocked that deal, and Spirit wound up in bankruptcy. Along the way Spirit and Frontier talked merger again several times. Each time Spirit wanted too much money, and ultimately cost its shareholders money.
Frontier CEO Barry Biffle was announced as departing on Monday and now there’s word that merger talks between Frontier and Spirit are back on. Those two seem related.
Earlier in the month I wrote that JetBlue founder and Breeze CEO Dave Neeleman said the two airlines would merge because it made too much sense, and didn’t make sense for them not to. His argument was:
- “I think Spirit and Frontier need each other…[Frontier CEO] Barry Biffle may not say that, but they do.”
- “Spirit’s restructuring is meaningful” referring to flight attendant and pilot cost reductions as well as cash raised.
- Spirit and Frontier “need the synergies” because “there’s room for a ULCC in the U.S. but probably not two.”
Ultra-low cost carriers in the United States have struggled since the pandemic.
- Their cost advantage eroded, as pandemic wage inflation affected everyone and airport costs have often risen.
- Consumer preferences changed, looking to pay for more differentiated service, and also wanting to travel to places that Frontier doesn’t service (and Frontier lacks partners who do)
- Major carriers became better competitors, dropping prices to match Frontier without cannibalizing their higher fare revenue (tuning basic economy so that high fare customers don’t want it, while letting them pick up business that might have gone to ultra-low cost carriers).
The industry’s profit driver is credit card, and Frontier was creative early in trying to make up for not having much aspirational to offer to cardholders. They revamped their loyalty program to offer status credit for every dollar of card spend before any other airline. But they can’t give you a lie flat seat, they can’t give you travel to Europe and Asia, and they have no lounges.
While legacy airlines found a way to compete on fare without cannibalizing their revenue base, they also have upsells to offer. Both Spirit and Frontier have pivoted to offer more premium products in addition to their bare bonus proposition. Frontier has had greater cost discipline as well, and their former CFO is now interim CEO.
I see a merged Frontier Spirit succeeding only in a chapter 11 filing again in less than two years!
Good luck to this combination of hot messes. No wonder Barry Biffle did not want his name on this.
The low quality ULCC model fundamentally does not work long term in the US context (where domestic flights are long and there are good roads for driving). Even Spirit and Frontier merging will not solve the problem unless they fundamentally change the business model (it will merely slow the bleeding).
Competing on price through quality cuts is a race-to-the-bottom. Profit spikes from quality-based cost cutting are temporary because they rely on effectively “tricking” customers (cutting quality while hoping they don’t notice until after they book at a comparable price as before). As soon as customers realize they have been duped their willingness-to-pay drops. This leads the airline to cut quality further to try and maintain the unmerited profit margin, leading to a further deterioration in willingness-to-pay. This becomes a doom loop until it literally becomes impossible to cut quality further (i.e. 28 inch pitch). At this point the brand reputation is permanently ruined, profitability plummets, and bankruptcy is inevitable.
It is also politically impossible to maintain market share and profitability through airport monopolization as a ULCC. The low quality of the airline will inevitably lead to demands for the airport to allow in better competitors. A premium airline with a better onboard experience, by contrast, has more political clout to be able to get away with having a large percentage of gate slots at an airport (within reason).
@Steven: Yes, I agree that the RyanAir model requires continually finding new ways to trick customers who have learned to avoid the old traps. I am puzzled how RyanAir remains successful.
No. Liquidate both companies. Any other airlines interested in the remaining assets can buy them on the open market.