The news broke early yesterday, and people couldn’t stop talking about it… Maury Gallagher is retiring as CEO of Allegiant! Oh wait, not that bit of news, though a hearty congratulations to Maury. Of course, the biggest news of the day was that Frontier and Spirit will merge. Finally. This has been rumored and suggested for so long that it’s almost anti-climactic.
Spirit and Frontier will come together to form the 5th largest airline in the US and become a clear leader among ultra low cost carriers (ULCC). This may sound like an enormous airline, but put it in context. According to Cirium data, in March 2022, Ryanair will still be almost twice as large in terms of seats.
The two airlines’ paths have crossed time and time again over the years. Spirit was the original ULCC in the US, but Frontier got there eventually. And when Indigo Partners saw what Frontier was doing and how cheap it could buy the airline from wayward owner Republic, Indigo dumped its holdings in Spirit and bought up Frontier instead. Frontier’s CEO, Barry Biffle, learned his ULCC chops at Spirit.
Now, the two airlines will come together in a surprising way. Frontier shareholders will own 51.5 percent of the new company while Spirit shareholders will own only 48.5 percent. This control doesn’t come cheap as Frontier will pay Spirit shareholders 1.9126 shares in the new company plus $2.13 for each Spirit share they own today. Spirit, after all, is the larger airline. Its full year 2021 revenues were $3.175 billion while Frontier’s were $2.060 billion. Spirit ended 2021 with 173 airplanes while Frontier had only 110. But why does Frontier care about having control? This is the Bill Franke show.
Bill Franke runs the Indigo Partners private equity group which has been behind all sorts of ULCCs around the world, most of them successes like Wizz Air and Volaris but some… not so much. (Look up Avianova in Russia.) Indigo has been wildly successful in the US, both when it bought and eventually sold its stake in Spirit and with its cheap acquisition and subsequent IPO at Frontier. The assumption was that Indigo would eventually bring these two airlines together, and that is what’s happening here.
The new airline will have Bill Franke as the Chairman of the Board, and he will lead the search for the management team, but that’s about all we know. The surviving name hasn’t been chosen, nor has the headquarters city or anyone on the management team. There is very likely a good reason for this.
There is plenty in the investor presentation about how this will be good for consumers and will create opportunities and all that, but let’s remember that when Frontier went public, it took the ULCC ticker symbol. Low costs are the key to everything for this airline, because that’s what enables low fares. There will clearly be an effort to get costs even lower than they already are through — and I hate the word — synergies.
Spirit’s unit cost stage-length adjusted ex-fuel and special items for 2021 was .41 cents higher than Frontier’s, and both are very low in comparison to others. These are higher than they should be, and they will come down once pandemic-related issues are further behind the airline, but the fact that Frontier is lower than Spirit shows just how serious that airline is about costs.
I have little doubt that Indigo will use every opportunity it can to bring down those costs. A headquarters competition between South Florida and Denver? Oh yeah, that’s a great way to squeeze out every penny from the locals. The name can be used as a bargaining chip if any one area cares about it, kind of like how Dallas/Fort Worth would have freaked out if US Airways survived. Presumably all else being equal, Indigo would go with Spirit as the name since that means there are fewer airplanes to paint. But I imagine everything is on the table if there is money to be made.
As for the management team, well, I’ll be curious to see where that goes. I have little doubt that some of the current people running the airlines will just want to leave. They’ve been through a lot, and a merger is not easy. But otherwise, Bill will pick and choose those who he thinks can best create the ultimate ULCC. What exactly that means isn’t yet clear since both airlines have come to different conclusions in some areas despite having the same goals.
Yes, both airlines have a similar basic model. They use Airbus narrowbodies to serve mostly big cities to appeal to the leisure traveler. They both have an unbundled model that has a low base fare along with the option to either buy a la carte or add bundles to get to the product each traveler wants. Spirit is based in Florida while Frontier is based in Denver, and the networks are largely complementary with the main overlap being in Florida itself, a good place to be in these days of heavy leisure demand.
In fact, looking at March, Spirit has nearly 62 percent of its departures touching Florida on one end while Frontier has more than 52 percent. If we look at the route map, these are the airports that have more than 3 percent of departures for each airline.
Frontier and Spirit Largest Airports March 2022
Frontier and Spirit are large and will get larger in Florida and Las Vegas, the two biggest leisure destinations in the Continental US and also — not coincidentally — the largest places in Allegiant’s operation. Spirit brings its legacy presence in Detroit along with Houston and Atlanta to the mix while Frontier adds Denver, of course, and Philly. Chicago is big for both, though Frontier has been shifting its service to Midway.
This will help both airlines to increase coverage, but the differences go much deeper than this. There is a philosophical difference in how the airlines build their networks.
Frequencies by Route March 2022
Spirit has long had a focus on serving routes at least once a day. Sure, it has some that go less, but for Frontier, sub-daily is the airline’s bread and butter. Now, you bring them together, and do the philosophies change? Does one win out? Or does it truly just become a combination of both, serving cities big and small with varying frequencies as needed?
These are all questions that will be answered over time. We’ll also see whether the Big Front Seat (domestic First Class with no extra service) survives or if Stretch seating (extra legroom coach) will win out. I find myself assuming that we’ll see Stretch win if it pays for itself, which it probably does or Frontier would have given it up long ago. But we won’t have any idea of the actual direction until we learn the management team’s makeup.
In the meantime, it’s all about presenting sunshine and rainbows and convincing the feds to allow the merger to go through without a challenge. It’s hard to see how a challenge would be successful here. What would they want the airline to give up? Gates in Orlando? Then again, this DOJ is doing odd things with the whole challenge of the American-JetBlue Northeast Alliance, so who knows what will happen.
Overall, I like this merger, and I think it’s been a long time coming. That being said, I should reserve my full judgment until we get more details than the sparse information we learned yesterday.