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Frontier and Spirit Airlines Bet on the Future of Air Travel

Passenger plane, business trip, travel concept. Flying evening sunset

After struggling for two years during the pandemic, the airline industry is showing signs of renewed confidence as Frontier Group announced a $2.9 billion deal to acquire Spirit Airlines. Expected to close in the second half of 2022, the airlines are counting air travel’s resurgence from its two-year slump.

During 2021, U.S. air travel jumped 83% over 2020 levels, but remains 27% below pre-pandemic levels. COVID-19 has left a lasting mark on the industry: with borders closing in the face of the omicron variant, international travel was down 38% in January; and business travel remains 51% below pre-pandemic levels as companies have substituted technology for in person meetings – perhaps permanently. Travelers have been reluctant to fly due to concerns of exposure to Covid-19 as well as aversion to mask mandates and other restrictions in place. 

Further, airlines have struggled with a surge in bad behavior in the skies, with 2021 capturing the record for worst unruly airplane passenger behavior.  The vast majority of incidents (72%) were related to wearing masks and many escalated to assaults or verbal abuse. Reports of such hostility have quelled travelers’ appetites for air travels and also fueled shortages in airplane staff. Airlines have responded to these headwinds by cutting costs. 14% fewer flights were operating in January 2022 compared to pre-pandemic levels. 

But some are confident about the future of air travel. The ultra-low-cost niche is the fastest growing segment within the airline industry. Low cost carriers first emerged soon after deregulation allowed airlines to set their own fares in 1978 as Southwest Airlines challenged the dominant legacy carriers with paired down services in exchange for discounted fares. Taking it a step further, ultra-low cost carriers then emerged more recently as an option for cost conscious flyers who want to pay only for those amenities they use – whether that includes meals, choosing their seat, or carrying luggage. Ultra-low cost carriers Frontier and Spirit have focused on cutting costs so they may offer bare-bones fares, while up-charging for various services. While many travelers accustomed to the legacy carriers originally balked at this approach to travel, many have now become accustomed to this new model. 

In fact, ultra-low cost carrier Ryanair has grown to dominate European air travel, carrying the most travelers on the continent in 2020. With this deal, Frontier and Spirit are betting that Americans will follow this trend. 

The Frontier-Spirit merger is projected to save flyers $1 billion annually and “change the industry for the benefit of consumers, bringing more ultra-low fares to more travelers in more destinations across the United States, Latin America and the Caribbean, including major cities as well as underserved communities,” according to the deal’s press release.

The deal faces regulatory scrutiny, which has become a threat to other announced mergers over the past year. The Biden Administration has repeatedly vowed further antitrust actions, blaming industry consolidation for feeding price increases across travel and other industries. But with the four legacy carriers continuing to control 80% of the US market, Frontier and Spirit are confident the merger will close this year. According to Matterhorn’s M&A database, which harnesses AI and attorneys to track publicly-announced deals over $25 million in value, Spirit Airlines was advised by law firm Debevoise & Plimpton LLP and financial advisors Barclays Bank and Morgan Stanley. Frontier Group was advised by law firm Latham & Watkins LLP, and financial advisor Citigroup. 

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