Are Airline Mergers Investment Opportunities?

Frontier Airlines announced that it plans to buy Spirit Air. This announcement immediately raised concerns about antitrust actions by the Biden administration. Our first thought was this. Are airline mergers investment opportunities? Antitrust action could kill the buyout and make our concerns a moot point. But, assuming that the buyout goes through is there any profit for the investor? The first clue is in how the market reacted to the news.

Spirit Stock Price Reaction to Buyout News

Upon the news that Frontier Airlines wants to buy Spirit Air, Spirit’s stock popped up from its $21.73 closing on Friday, February 4, 2022 to $24.94 on its opening Monday, February 7, 2022. Over the following four days the stock continued upward to trade at $27.97 on the morning of February 11, 2022. That is a 14.70% gap up on the news followed by another 14% increase over the pre-announcement price. We believe that the market has priced in the likelihood of anti-trust action stopping the buyout. Thus, the market sees the buyout as good news for Spirit Air shareholders. It is not clear if the share price will continue to go up as the time for the buyout approaches.

Are Airline Mergers Investment Opportunities?

Frontier Stock Price Reaction to Buyout News

The initial Frontier stock price reaction to buyout news was not as impressive as Spirit’s share price increase. Frontier closed at $12.39 a share on Friday, February 4, 2022 and gapped up to $12.53 at the Monday, February 7, 2022 opening only to immediately drop to $12.21. Thus, the market’s initial reaction was to send the stock down by 3.5%. However, as the market digested the news the stock rose over the following days to trade at $14.51 on the morning of Friday, February 11, 2022, a 15.8% increase over the pre-announcement price. Our take on this is that the market is assuming that anti-trust action is unlikely and that Frontier’s argument that the combined airlines would not only create jobs and save money for consumers but also lead to greater profitability for the combined airlines.

Are Airline Mergers Investment Opportunities - Frontier Share Price

How Big of a Deal is a Potential Frontier Buyout of Spirit Airlines?

Frontier is the smaller of the two air carriers and only went public on the Nasdaq on April Fool’s Day of 2021. However, the combined airlines would be the fifth largest in the USA behind American, Delta, Southwest, and United. Airlines everywhere have been hurting as a result of the Covid K-shaped recession. There has been legitimate concern if many travel stocks can recover. The usual reason for such buyouts is to save money by reducing staff and to make more money by extending the reach of the business. A combined company will provide service to more airports in more cities thus increasing the ability to attract more flyers with cheap “no frills” fares. And, when a company buys out a competitor they are often able to increase prices (fares) which will hurt customers but increase company profits. In pitching the buyout both companies say that the deal will result in $1 billion a year in savings, offer new routes, improve service, and add more jobs over the following four years.

Is There Profit to Be Made Today from a Frontier Buyout of Spirit Air?

When a buyout is likely to go through and will affect profitability the profits can be calculated from the terms of the buyout in cash and shares. When there is a possibility of the deal not going through such as with anti-trust action, the market will commonly discount expected profits. If the deal results in reduced costs to the combined company or increased income one should expect to see the combined company share price go up as these goals are realized. The uncertainties in the mix for this buyout are anti-trust action and realization of either cost savings or improved business profitability of the eventual business entity.

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