For three years now, Frontier and Spirit have been trying to merge. Oh sure, there was that little distraction when Spirit ditched Frontier for JetBlue, but the love never stopped burning in the background. It sounds like talks started to heat up again recently, but now, it has gone cold once again because they can’t agree on what Spirit is worth. (Spoiler alert: Spirit thinks it’s worth a lot more than Frontier does.)
Back in February 2022, Frontier and Spirit agreed to merge and all seemed right in the world. Frontier shareholders would get 51.5 percent of the combined company with Spirit getting 48.5 percent. For each share they owned, Spirit shareholders would get 1.9126 Frontier shares and $2.13. That was worth about $2.8 billion considering the share price at the time.
When JetBlue tried to blow up this plan, Frontier ended up raising the cash piece to $4.13 per share, adding another $200+ million in value. Despite Spirit’s management pleading for shareholders to take the deal, they would not. They chose JetBlue, and as we know, the Department of Justice (DOJ) shot that down and it all fell apart.
The time that passed was not good to Spirit. The airline was bleeding money and shrinking, and it was barreling toward bankruptcy. Apparently last summer, Frontier saw this and decided to take another run at a merger at a greatly reduced value.
The airlines disclosed in an SEC filing that last summer’s discussions involved Spirit stakeholders getting only 26.5 percent of the combined company plus $580 million paid toward debt. Spirit said at the time that its bondholders weren’t happy with that, so nothing happened. But then in November, Spirit ran out of time and filed for Chapter 11 bankruptcy protection.
Now with Spirit in bankruptcy, Frontier decided it was a good time to try and make a run once again before the airline exited on its own. This time, with Spirit in bankruptcy, it had a further revised offer. Can you guess which way it was revised?
The new offer was for Spirit’s various stakeholders to get a mere 19 percent of the combined company. In addition, Frontier would put in $400 million toward debt, but there’s a catch. This plan requires Spirit’s creditors to issue $350 million worth of debt to pay off the debtor-in-possession financing used in bankruptcy. Oh my, how the mighty have fallen.
Spirit’s response to this was a hearty middle finger. Actually, it didn’t start off that strong. In a letter, the airline said it absolutely sees a lot of merit in the combination but also… this offer is a joke. The airline had a ton of questions about details, but in general, this sums it up well:
…we have discussed the new Frontier proposal with the advisors to our bondholders as contemplated by your letter and required by our restructuring support agreement. We are told they believe your current proposal is so insufficient as not to merit a counter.
Right, so, take that Frontier. Frontier hoped it could change Spirit’s mind by putting together a nifty Powerpoint presentation. There was some back and forth, but the two airlines were really talking past each other and not getting the answers that were truly needed. (You really should read the SEC filing to get a feel for this.)
Spirit basically left it this way at last check:
- the demand for creditors to pour in $350 million is not ok
- this deal is costly and more notably, risky, in that it extends the amount of time before Spirit comes out of bankruptcy until the merger could be completed
- the proposal is “woefully insufficient financially”
In effect, Spirit says that it doesn’t have time for these shenanigans any longer, and it needs to finish up and exit bankruptcy protection as a standalone airline. It can’t waste any more time on something that creditors won’t even consider worthy of a response.
From Frontier’s perspective, this might be the end of discussion. In an email buried in that SEC where it tried to answer some questions, Frontier noted that it wants to do the combination in bankruptcy and only in bankruptcy, because it is not a believer in Spirit’s standalone plan. Frontier CEO Barry Biffle bluntly explained, “you will emerge highly levered, losing money at the operating level and this would not be a transaction we would pursue.”
Further, Barry says that the airline will be so weak and vulnerable that other airlines could very well try to finish it off, and that might happen before a merger could even be completed because of how bad the exit plan is in Frontier’s eyes. Spirit, obviously, feels different. It says it likes its plan. Of course, what else can it say?
Could this be all talk and a deal might still get done? Of course. In fact, I wouldn’t be surprised if a new press release announcing a merger does come soon. It’s still entirely possible that Frontier could raise its offer and Spirit will rapidly reverse course, but the fact that this whole conversation was released publicly and Spirit confirms it let the NDAs expire suggests that we may have hit an impasse.
What does seem clear is that it’s going to make it a lot tougher to make this deal work if Spirit exits bankruptcy on its own. At least, that’ll be true unless Frontier is right and other airlines beat Spirit down toward bankruptcy. At that point, maybe Frontier could pick up the nearly-dead carcass for a song… but only if Frontier is right.
Edited to fix minor typo
16 comments on “Frontier and Spirit Really Want to Merge, but They Can’t Agree on Terms”
I’d let Spirit fail and then buy up the pieces that I want.
Same here. Although, they might face a battle from the legacy carriers who’d also want pieces from a post Chapter 7 Spirit, especially when said legacy carriers also have deeper pockets than Frontier.
If they do that, they might get into a bidding war. Plenty of other airlines will want to buy the pieces.
The only shocking thing in that presentation you shared was that one of the emails contained in it had “Sent by Blackberry” in the footer.
This is Spirit’s only option and they should seriously consider taking it. Otherwise, the other airlines will feast on the carcass.
SAME! I was going to make that exact comment. I have been trying to figure out who John F. Grier is and I think he is somewhere in the middle men cohort trying to make the deal happen, or at least facilitating it.
Just a micro-example of how broken Spirit is… I live in one of their relatively new markets (CHS). They came in a couple years ago and offered flights to 3 or 4 destinations that already had non-stop service, including competitive non-stop service on multiple airlines (i.e. they were the third or fourth airline in the market between us and the NYC area, DC area, BOS, south Florida, etc.). Sure, their base fare was low, but the lowest/most basic bundle was always exactly the same price as their mainline competitors. So, the value proposition was basically a less reliable airline with less frequency at obscure times… to the same place for the same price? No wonder they’re where they are now…
Those mainline competitors are offering at that price because of Spirit (or Frontier or other LCCs). Once we keep flying mainline competitors only, LCCs will leave the market and we’ll pay much more. But then a new LCC will enter the market knowing that we’re paying hefty, letting us enjoy low-fares on mainline airlines for the next couple of years before leaving the market because we don’t fly them. That’s the cycle we’ve been observing in the last decade or two.
Yeah… I get that, but it still seems insane to me for them to enter a market as the 3rd or 4th competitor. I get it if they’re the 2nd airline flying a route (i.e. CHS-DTW they’re creating competition with DL who previously had a monopoly). But, CHS to DC area, NYC area, South FL, and BOS already had multiple airlines in those markets (including B6 and WN), so there was already price competition on those routes. How much more could you win on price when the fares were already decently low?
They entered LAX-SEA, an extremely competitive market with a ton of capacity from AS, DL, UA, F9, plus all of the other SoCal markets already served from SEA. And their 1x/day flight is a 5 AM departure from SEA. There is no way they can profitably make that work.
“Spoiler alert: Spirit thinks it’s worth a lot more than Frontier does.”
Next, you’ll be telling me that there’s gambling at Rick’s. LOL
If both sides want a merger badly enough, they’ll eventually agree on terms. – Captain Obvious.
I’m shocked, shocked to hear you say this!
As I stated before, “Never Accept the First Offer”. The creditors at Spirit are the ones calling the shots, not management. Just depends on how large a hair cut the creditors can tolerate. If Frontier is smart, they developed multiple scenarios before making the first offer.
In light of the Big Three, they smell blood in the water as well. However, even with the current “crazy” administration, the DOJ & DOT will push back on any type of merger with the Big Boys. However, they still yearn for the north east slots and the NEO airframes which would avail themselves via a Chapter 7 filing.
The above would be a perfect graduate school case study with each team defending their position.
Agreed. “If Frontier is smart, they developed multiple scenarios before making the first offer.” They likely have the 2nd offer ready to submit, if they haven’t already. And, given the ‘business friendly’ administration we now have in place, this should get green lighted in pretty short order.
In the end, this combination, if they can agree to terms, should strengthen them as a ULCC competitor to the Big 4 – SWA included.
“In the end, this combination, if they can agree to terms, should strengthen them as a ULCC competitor to the Big 4 – SWA included.”
No way. The flyer they’re depending on is parachuting out of the market. Their concerns are turning to the impact of the pending tariffs that will bust their budgets. They may not have a strong enough base of customers to make this merger worthwhile. A year ago yes, but not now.
Spirit and Frontier have no future as independent carriers. United, Delta, and American have all run circles around the ULCCs and figured out once and for all, how to compete, with basic economy options. The US airline industry is headed for more consolidation and that’s a good thing. Alaska, JetBlue, and Southwest will inevitably end up in part or whole into each of the US3 in a matter of time.
The bucket and spade set can fly Allegiant. No one really wants to own a piece of that.
Not exactly. 1. Southwest is too big to be swallowed up. 2. JetBlue could merge with Alaska & compete effectively with Alaska’s team. 3. As I said before the customer base that a merged Fronteer/ Spirit is depending on is disappearing do to the pending tariffs that the current administration is full speed ahead on despite the month delay.