The merger of two budget airlines should not hurt travelers’ budgets, industry experts say. In fact, it may ultimately have the opposite effect.
Spirit Airlines SAVE, +0.90% and Frontier Airlines ULCC, +2.38% announced Monday their plans to merge in a deal valued at $6.6 billion. The airlines claimed that the deal would deliver $1 billion in savings to consumers each year.
It’s a watershed moment for the budget-airline sector. For nearly a decade, budget airlines have grown more popular, prompting larger, full-service airlines to cut their prices, said Scott Keyes, founder of Scott’s Cheap Flights.
“With today’s news, the best case scenario for consumers is a stronger, larger budget airline that can compete even more with U.S. legacy carriers,” Keyes said in an email.
But will that best-case scenario bear out? Here’s what industry experts had to say:
Critics say consolidation hurts consumers — but this could be the exception
Critics of corporate mergers often cite the impact on their customers — and that’s likely to be no different here.
“Generally when airlines merge, there’s consolidation and that decreases competition, which isn’t really great usually for consumers,” said Adit Damodaran, an economist with travel-booking app Hopper.
If the two airlines operate in the same markets, the combination can lead to fewer flights per day operating out of those destinations. That reduces travelers’ options, potentially forcing them to spend more for the same flights.
“‘They compete more with the legacy large carriers than they do with each other.’”
— Adit Damodaran, an economist with travel-booking app Hopper
In the case of Frontier and Spirit, the amount of consolidation may be more limited. Both airlines operate the in the ultra-low-cost space. “They compete more with the legacy large carriers than they do with each other,” he said, referring to airlines like American AAL, +3.01%, United UAL, +2.90% or Delta DAL, +2.10%.
“When you think about it, if you know Spirit’s selling an airfare for $100 and Frontier is selling it for $95, that’s not really going to sway a consumer as much choosing between one of them as it would choosing between one of those two airlines and say, American or Delta, which is priced closer to $130 or $140,” Damodaran added.
Even after the merger, the company would have reason to charge a lower price than the top airlines to stay competitive, he added.
A merged Frontier-Spirit could expand their respective markets
Another factor to consider is the fact that Frontier and Spirit tend to serve different markets, according to Cowen airlines analyst Helane Becker.
Frontier has more coverage in the Western U.S., Mexico and Central and South America, while Spirit’s routes are concentrated in the Eastern U.S. and the Caribbean in addition to Mexico and parts of Central and South American. Becker said in a research note.
“There isn’t a significant amount of route overlap between the two companies,” Becker wrote, arguing that the Biden administration might not opt to block the merger as a result.
“‘There isn’t a significant amount of route overlap between the two companies.’”
— Cowen airlines analyst Helane Becker
Travel-industry experts argued that the merger is less focused on cutting costs than it is on giving the combined company more strength to expand.
“If the new airline remains aggressive in its route network — as both airlines have historically been — and puts more international routes on the schedule, we could see cheaper flights across the board,” Keyes said.
In the past, Frontier and Spirit were aggressive in expanding to markets that were already served by another low-cost carrier, such as Allegiant or Sun Country. Many of these were smaller markets. As a single company, the airline could set its sights on different locations.
“It seems like it’s more of a profitable opportunity to go after markets that aren’t even served by [a low-cost carrier] — to go after the markets that are traditionally served only by the legacy carriers,” Damodaran said.
Don’t expect fees to change — that’s how budget airlines increase their revenue
One important caveat to the potential positive outcomes for flyers: As budget airlines, one factor that sets Frontier and Spirit apart from their competitors is the large number of fees they charge.
Many aspects of the travel experience that come for free with other carriers — such as seat selection or stowing a carry-on in the overhead bin — cost extra when flying with Spirit or Frontier.
While merging to form a larger airline may mean they have sway in terms of airfares, travel experts didn’t expect that influence to expand to these other costs.
Southwest LUV, +2.03%, for instance, tends to have cheaper fares than airlines like Delta and American, but it continues to provide free checked luggage to its customers.
“I don’t think that it’s necessarily going to change the industry overall — I imagine that it will just be a consolidation of their policies,” Damodaran said.