The Big Yellow Bus of the Skies, aka Spirit Airlines, has recently announced the departure of its CEO Ben Baldanza, saying only that, “this is the right time to implement an orderly succession plan”. His replacement is former AirTran CEO Robert L. Fornaro. In the aftermath of this sudden change, reports have resurfaced that a merger could be in the works with Frontier Airlines. If such a plan is brewing, then what is the feasibility of such a merger from an operational perspective? How do the fleets and route networks of both airlines complement each other? Is it a good match or perhaps a bit misguided?
Such a union has been speculated ad infinitum, however the chances of it actually happening this time round just increased from remote to likely, given Farnaro’s involvement in several mergers over his career. The question remains however, could Indigo Partners really be looking for a merger? Well the key element to consider here is the metal of both carriers.
A tie-up would be a smart strategic decision given the almost identical aircraft in use. With fleets made up of all Airbus aircraft on both sides, integration would not be costly as maintenance staff would not need to be trained on different aircraft, and the airlines do not need to stock different aircraft parts in inventory. This eliminates such challenges as that Southwest Airlines faced when it merged with AirTran, when it needed to absorb the Boeing 717s.
They clearly complement each other. Combining Frontier’s fleet of 61 aircraft (not including metal on order) would propel Spirit’s fleet growth significantly, or in numerical terms, by 77%. This significant boost would not only expand the number of cities the new airline can serve, but also the routes it operates, given the cost-effectiveness and efficiency of the A320 family of aircraft.
With a combined total of 140 aircraft and a further 188 on order, the merged entity would still not be on a level playing field with the four mega-carriers in the US domestic market. The giant American Airlines has 965 aircraft, Delta Air Lines with 826, United Airlines with 714 aircraft and Southwest Airlines with 704 aircraft. However a combination would provide a solid ground for further network expansion and route development.
With the US4 controlling over three-quarters of the domestic air travel market, all of which have been through mergers in the last decade, any further consolidation is unlikely to occur amongst the major four due to antitrust regulations. This leaves the door open for the others that control the remaining quarter of the market: JetBlue Airways, Alaska Airlines, Spirit Airlines and Frontier Airlines, amongst a few others. This is supported by Indigo Partners CEO Bill Franke who said in Aug-2015 “I do believe there will be additional consolidation among a group of airlines that includes Frontier, Spirit , JetBlue, Alaska, and Virgin America.”
Do the networks overlap or complement each other?
Everyone loves to talk about mergers, however structural challenges can arise if the two entities are mismatched for each other. Yes Both Frontier and Spirit are ULCCs, but do their networks match for a merger.
Spirit Airlines
Frontier Airlines
You can be the judge, but it is evident minimal overlap exists between the two. In fact, if a merger were to happen, Spirit would go from serving around 160 routes to around 300, which shows how strong and far-reaching the airline can be. Combine this with a common A320 fleets and promises from American Airlines that it is prepared to match ULCC fares, I anticipate events will be forthcoming.
Both Spirit and Frontier are not financially strong. Frontier Airlines is much weaker than Spirit, with much less capital and higher debt, making it more difficult for it to be able to take on established legacy carriers such as American and Delta. Now that Indigo is looking to exit its investment in Frontier, a merger would make the most sense to ensure the carrier can survive on its own and thrive in the long-term.
Will the Department of Justice (DOJ) allow it?
The issue becomes, would the DOJ allow more consolidation in the market, when mergers in the last two decades have generally resulted in nothing but fare increases for the flying public. Well, with minimal network overlap, the Department of Justice (DOJ) may be in favor of such a deal, as it would create a large, more powerful ultra low-cost carrier to balance out the full-service ratio in the domestic market.
As Mr Baldanza once said, Spirit Airlines stimulates whichever markets it enters, noting Spirit shakes up every market it enters and causes fares to decrease drastically, due to its ‘Spirit effect’. This combined with the minimal network overlap, means allowing a merger would not reduce competition on a significant number of routes, but would further reduce pricing on many more. This could be the magic bullet in allowing a merger to go through.
The court of public opinion
Do those who fly ULCCs really care if the two merge? Unlikely, given that their main concern is the price of the airfare rather than the airline. However a merger could possibly mean improved customer service for Spirit Airlines, which is a major plus for the traveler.
It is well known customer service has not been Spirit’s forte, however an integration of staff and training could possibly see Frontier bringing in its front of house training into focus and ultimately improving customer-facing operations. In this day and age, the customer experience has a far greater impact on the customers perception of the overall experience than often times the core product. This is well documented in the hospitality industry where it is said ‘great customer service saves bad food, but no food can save bad customer service’. Given the ULCC basic product, an improvement in customer service could be a game changer.
Final word
A merger between Spirit and Frontier would provide Spirit with a significant boost to both its impact on the US marketplace and its stock price. It would also likely improve its revenue and profits significantly over the long-term. A merger would certainly create a bigger and stronger national competition for the US4, which in turn keeps them honest. After all, having a few small, almost regional airlines competing against the big four is not much of competition. While one can not predict for sure, it is clear however that the two are moving in the direction of a merger eventually, rather than moving further apart.
Zina Aziz is an aviation analyst and enthusiast from Australia. Having been fascinated by the airline industry for as long as she can remember, she greatly enjoys writing and analyzing the latest news and developments. Be sure to join her on Twitter, LinkedIn and Facebook.
Top image, “N534NK LAX (16966395407)” by Eric Salard – N534NK LAX. Licensed under CC BY-SA 2.0 via Wikimedia Commons.
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