Matt Patterson via AP
Frontier Airlines planes parked at gates at Denver International Airport, September 25, 2021
After years of rumors swirling over the next major airline merger, low-cost carrier Frontier Airlines announced on Monday that the company would be acquiring a majority stake in its chief competitor Spirit Airlines. In a statement, Spirit CEO Ted Christie said, “This transaction is centered around creating an aggressive ultra-low fare competitor to serve our guests … resulting in more consumer-friendly fares for the flying public.”
If approved, the new company would become the fifth-largest airline in the United States. Currently, 80 percent of the market is dominated by American, Delta, Southwest, and United.
The $6.6 billion deal awaits approval from the Department of Justice. Though the Department of Transportation plays no formal role, they will have input behind the scenes, making this a test for Transportation Secretary Pete Buttigieg.
At first glance, the Frontier/Spirit deal might appear to be two smaller players creating a formidable competitor to the four other dominant airlines, by offering low-cost alternatives for flyers on a budget.
Behind the curtain, however, it’s a deal orchestrated by Bill Franke, founder and managing partner of the airline buyout–focused private equity firm Indigo Partners. Franke has served as chairman and a key shareholder of both Spirit and Frontier. His firm also has stakes in Wizz Air, JetSMART of Chile, and Mexico’s Volaris, as well as 83 percent of premerger Frontier.
If the deal is approved, Franke’s Indigo Partners is expected to own a 43 percent stake in the newly combined Frontier and Spirit’s $6.6 billion valuation, a massive return on Indigo’s initial $36 million investment into Frontier back in 2013, which was purchased through selling shares of Spirit. But Franke will have to get past the newly energized antitrust agencies in the Biden administration.
On a quarterly earnings call Monday, Frontier CEO Barry Biffle shrugged off investor concerns over the government blocking the merger. Instead, Biffle listed how consumers would benefit by allegedly saving a billion dollars a year, because more flight options would compete directly with the Big Four, and how the company would expand operations into smaller, forgotten cities across the United States.
“We’re excited to tell our story to [regulators] and we think it will be well received,” said Biffle.
Investors should err on the side of caution. Last February, American Airlines and JetBlue announced the Northeast Alliance, an arrangement where the two companies could coordinate schedules with one another, but not fares. Even Spirit called the deal a “pseudo-merger.” For the alliance’s approval at the tail end of the Trump administration, the Department of Transportation required American Airlines to divest seven slot pairs at JFK and six slot pairs at Washington National Airport.
The reassessment of the American/JetBlue deal suggests an intellectual shift in antitrust enforcement.
Still, the two carriers were not yet in the clear. Last September, as key antitrust advocates entered Biden’s administration, the Department of Justice filed a lawsuit against the American/JetBlue team-up, directly refuting the airlines’ claims that the deal would increase competition, and effectively calling the alliance a merger. That litigation is pending.
The reassessment of the American/JetBlue deal suggests an intellectual shift in antitrust enforcement that accounts for increasing concentration in 75 percent of U.S. industries and price-cost markups that have tripled over the past 40 years.
The lawsuit was filed two months before Jonathan Kanter’s approval to the DOJ as assistant attorney general for the Antitrust Division. At a virtual event two weeks ago, Kanter said, “We must be mindful that economics—and expertise, more broadly—are merely tools to understand facts relevant to a particular case. Courts should use economics and industry expertise to address questions of fact, not to resolve questions of law.”
Lack of choice in the airline industry and an extreme focus on shareholder interests in maximizing profit have trickled down into a demonstrably worse customer experience. Prospect executive editor David Dayen’s Monopolized: Life in the Age of Corporate Power detailed how industry deregulation has led to competitors fighting for who offers the least-worst experience—at a premium price.
The race to the bottom is best embodied by ultra low-cost airline carriers like Frontier and Spirit. Franke’s 2013 investment in Frontier was followed by more than a quarter of its workforce being outsourced, thereby removing the airline carrier’s responsibility for those workers. It also led to an increase in seats on planes, the removal of seat-back TVs, and the introduction of charging for carry-on bags, seat reservations, and soft drinks. Boosted partially by cheaper fuel, according to The Wall Street Journal, in 2015 Frontier earned $129 million, more than during the entire prior decade.
By 2019, airlines worldwide collected $109.5 billion in ancillary (non-ticket) fee revenue, a fivefold increase from $22.6 billion in 2010. Private equity relies on stripping customer experience to make customers desperate, while charging as much as possible through add-ons to make the experience a bit more bearable. Spirit and Indigo Partners’ Wizz Air earned more than 50 percent of their revenues through ancillary fees. The result is a hideous customer experience that isn’t as cheap as advertised.
Frontier claims its acquisition of Spirit is about improving opportunities for consumers by investing in forgotten cities. Yet what’s kept from the public is how the business interests behind today’s mergers and acquisitions are the very same entities that consolidated the airline industry in the first place.
Coming into the Biden administration’s second year, antitrust enforcers could see this merger as the perfect opportunity to undo the damage against consumers wrought by financiers like Bill Franke.
