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.