• Wed. May 11th, 2022

Why the Frontier-Spirit deal lifted the entire airline industry on Monday

The stock market opened the new week on a positive note, with investors seeing some lingering volatility but ending up happy with market progress by mid-afternoon. Starting at 3 p.m. ET, the Dow Jones Industrial Average (DJINDICES: ^ DJI) was up 180 points to 35,269. S&P500 (SNP INDEX: ^GSPC) climbed 12 points to 4,513, and the Nasdaq Compound (NASDAQ INDEX: ^IXIC) picked up 26 points at 14,124.

Falling stock prices often prompt companies to make strategic acquisitions, and the latest pair of companies to decide on a merger has come from the airline industry. Specifically, Spirit Airlines (NYSE: SAVE) and Frontier Group Holdings (NASDAQ: ULCC) made a move that sent both their stocks up. Indeed, even with the impact on the competitive environment across the industry, most of the two companies’ peer airlines have also made strong progress. Below, we’ll take a closer look at what helped the industry move forward on Monday and why Spirit and Frontier’s competitors won’t necessarily be hurt by the deal.

Image source: Getty Images.

A great partnership in the sky

Shares of Spirit Airlines rose 18% by mid-afternoon after Monday morning’s announcement. Frontier shares rose more than 4%, which is somewhat unusual for the acquiring company in a merger.

The combination will produce a company with a market capitalization of approximately $6.6 billion. Bringing the two route maps together will produce an industry player that will be the fifth largest in the US airline industry, serving more than 145 destinations in the United States, Latin America and the Caribbean. The service expansion is expected to help speed up schedules to underserved markets in the United States, and both airlines see greater fuel efficiency helping generate $1 billion in savings for customers.

Under the terms of the agreement, Spirit shareholders will receive $2.13 per share in cash plus 1.9126 Frontier shares for each Spirit share held. This places a value of $2.9 billion on Spirit, which would give Spirit shareholders overall a slightly lower position in the combined company than Frontier shareholders will retain. Frontier will recruit seven out of 12 members to the new board. The companies hope to complete the merger in the second half of 2022.

Are more offers coming?

Since the combined Frontier-Spirit would pose a competitive threat to the rest of the airline industry, it would be natural to think that the shares of these other airlines could decline. However, it was the opposite.

Among the big four airlines, shares were uniformly higher. American Airlines Group (NASDAQ: AAL) was the biggest gainer with a 6% increase, followed by United Airlines Holdings (NASDAQ: UAL) and its 5% increase. Delta Airlines (NYSE: DAL) gained 4%, while South West Airlines (NYSE:LUV) was the weakest player but still gained 3%.

Additionally, some of the smaller carriers have apparently gained traction on speculation that they may soon need to strike deals themselves. Alaska Air Group (NYSE:ALK), JetBlue Holdings (NASDAQ: JBLU)and Hawaiian Funds (NASDAQ:HA) were all up between 4% and 5.5% on the day.

With continued pressures on the travel industry, combining resources could be important for the survival of airlines. In addition, the consolidation of complementary businesses could help increase efficiency and make the airline industry more profitable. That’s why the Frontier-Spirit merger is unlikely to be the last strategic move investors will see in airspace in 2022.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.