Spirit Airlines(NYSE: SAVE), the discount airline that at one time had agreed to be acquired by Frontier Group Holdings (NASDAQ: ULCC) before jilting Frontier for another, is being forced to fly alone. Investors are rallying into Frontier shares on the news, sending the stock up 11% as of 3 p.m. ET.
Frontier could end up the big winner even after losing
Frontier's business plan was borrowed from Spirit, and when the two airlines announced plans to merge in February 2022 to create the nation's fifth-largest airline, there was a lot of excitement about the combination. But those plans were thwarted by JetBlue Airways(NASDAQ: JBLU), which stepped in with a bid of its own and ended up with an agreement to buy Spirit.
Frontier warned during the bidding war that regulators would likely frown on a JetBlue/Spirit combination, and that prediction proved accurate. On Monday, JetBlue and Spirit abandoned their merger plans after the U.S. government successfully sued to block the combination.
The breakup leaves both JetBlue and Spirit scrambling. JetBlue will have paid out more than $300 million in termination fees and contingency payments to Spirit and its shareholders, and no longer has the deal to fuel long-term growth. Spirit, meanwhile, faces operational challenges and upcoming debt payments that could be tough to refinance in today's higher-rate environment.
Meanwhile, Frontier has spent the last year going about its business. The company impressed investors with fourth-quarter results and sees strong growth up ahead, helping it to leapfrog past JetBlue and Spirit as one of the more compelling growth stories in the airline industry. Investors are rallying into the shares, thinking that Frontier is well positioned to benefit from the JetBlue/Spirit deal's demise.
Is Frontier a better buy than Spirit or JetBlue?
The market could also be speculating that Frontier will now swoop in and offer to buy Spirit at a lower price, since its primary competition for the prize, JetBlue, is out of the picture. That could happen, though Frontier is likely to be patient and see how its own business evolves in 2024 amid questions about slowing demand industrywide.
Even without Spirit, Frontier has said it expects to grow capacity by 5% to 7% year over year in the first quarter and 12% to 15% for the year. Although the company is focused primarily west of the Mississippi, it is set up well to take advantage of any issues at Spirit and move quickly to enter any East Coast markets where Spirit might be on the retreat.
Frontier was well positioned to succeed even against a merged JetBlue/Spirit. Absent the creation of a new airline titan, there is plenty of clear sky for Frontier to fly into.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
