On February 7th, Spirit and Frontier Airlines announced a $6.6 billion merger agreement between the two companies to create “America’s most competitive ultra-low fare airline.” With this merger agreement, the combined company would provide more than 1,000 daily flights to over 145 destinations. The two airlines have similar business models, offering low fares combined with charges for anything extra, including carry-on luggage. Frontier and Spirit believe this merger would increase competitive pressure to provide more consumer-friendly fares. In the press release, it’s estimated that the merged airline would deliver $1 billion in annual consumer savings.
However, many criticize both companies’ business models for their poor consumer experience. Spirit and Frontier respectively had the first and second worst customer satisfaction ratings according to the American Customer Satisfaction Index. The US Department of Transportation also reported that Spirit and Frontier received the first and third highest number of customer complaints in 2021.
The merged company would become the fifth largest airline in the United States behind the “Big Four” of American, Delta, Southwest, and United Airlines. Despite this, those four airlines would still retain 80% of the US airline market, while the merged Frontier and Spirit would control less than 10%. But the Biden Administration’s aggressive approach to regulating antitrust issues signals potential regulatory hurdles ahead.
At the end of 2021, the Department of Justice filed an antitrust lawsuit against American Airlines and JetBlue for combining their operations in several Northeast airports. The Justice Department’s suit called that alliance a “de facto merger” and said that the arrangement would reduce incentives to compete in the Northeast region, harming consumers across the country with higher fares and decreased flying options. The American Airlines-JetBlue alliance would pool their gates and takeoffs; coordinate routes, schedules, and aircrafts; and share their revenues at the three main New York airports and Logan International in Boston. While not a true merger between the two airlines, but the Department of Justice treated it like one. Given this precedent, it seems very likely that the Biden Administration will either highly scrutinize the Frontier-Spirit merger or altogether attempt to block it on antitrust grounds.
The record-breaking levels of M&A activity and the highly monopolized nature of the U.S. airline industry might also explain the Biden Administration’s tough stance. Global M&A deals increased by 63% to $5.63 trillion in 2021. The United States accounted for $2.5 trillion of that total. Vanita Gupta, a Justice Department official, recently announced at an antitrust symposium that “if your company approves a merger that may lessen competition, we will block it.”
The airline industry became highly consolidated in the last 25 years through a series of mergers, resulting in the four largest airlines in the United States we have today. If the Frontier-Spirit merger goes through, it would be the first airline merger since 2016, when Alaska Airlines purchased Virgin America. This high level of consolidation might explain the anticipated regulatory barriers Frontier and Spirit face.
With such a small combined market share, the Frontier-Spirit merger typically wouldn’t attract large regulatory attention. However, for the reasons stated above, this merger may have an uncertain future. Frontier would be purchasing Spirit in this deal, but both companies saw only modest increases in their share prices on the day the merger was announced, indicating investor wariness. The companies expect to have the merger close in the second half of 2022.