© Reuters. FILE PHOTO: A Spirit Airlines Airbuys A320-200 airplane sits at a gate at the O’Hare Airport in Chicago, Illinois October 2, 2014.REUTERS/Jim Young/File Photo
(Reuters) -Budget carriers Frontier Group Holdings and Spirit Airlines (NYSE:SAVE) Inc on Monday unveiled plans to merge in a $2.9 billion deal that would create the fifth-largest U.S. airline and tighten competition against traditional carriers.
The tie-up combines stablemates of legendary airline investor Bill Franke, a pioneer of rock-bottom fares coupled with top-up charges offered by ultra low-cost carriers (ULCC).
Such airlines are a tier below Southwest Airlines (NYSE:LUV), which pioneered the low-cost concept in the 1970s, and have continued to expand during the COVID-19 pandemic at the expense of larger rivals.
The companies expect the cash-and-stock deal to accelerate investment and help take on major U.S. airlines like American Airlines (NASDAQ:AAL) Group, Delta Air Lines (NYSE:DAL), Southwest Airlines and United Airlines Holdings (NASDAQ:UAL).
Shares of major U.S. airlines rose between 1.3% to 1.8% in premarket trade.
The Frontier-controlled business is seen adding 10,000 direct jobs by 2026, the companies said, adding that they expect to deliver $1 billion in annual consumer savings and offer more than 1,000 daily flights to over 145 destinations.
The transaction value of the deal is $6.6 billion including the assumption of net debt and operating lease liabilities, the carriers said in a statement.
Colorado-based Frontier will own 51.5% stake in the combined entity, while the remaining 48.5% will be held by Spirit’s shareholders.
Spirit, which was trading at $44 before the onset of the pandemic in February 2020, was offered to be bought at $25.83 per share, which represents a premium of 18.8% to the stock’s last close on Friday.
The announcement comes as major U.S. airlines project profitability in 2022 due to higher vaccination rates and reopening of economies after pandemic-led lockdowns and emergence of new variants hit their business.
Spirit shares were trading 12% higher at $24.43 in premarket trade.
Spirit and Frontier operate Airbus jets and participated in a 255-plane order spearheaded by Franke’s private equity firm, Indigo Partners, at the Dubai Airshow in November.
Franke will be chairman of the new airline, whose name has not been announced.