Editors' Pick: Originally published March 23.

America's next airline merger appears to be moving along very slowly, not that anyone involved in it has anything to say about it.

Someday, we must assume, Frontier and Spirit (SAVE)  will merge to form the largest ultra-low-cost airline in the U.S. Perhaps the airline can be called "Frontier Spirit." Perhaps, in keeping with the Western theme, the Denver-based carrier will cut a deal to have a Wells Fargo credit card.

The frequent flier program can be called Stage Coach, given that most of the seats will be in coach. The western theme would counter the airline industry's historic anti-regionalism trend, which has resulted in the disappearance of names such as Allegheny, Eastern, Northeastern, Northwest and Western -- although Alaska, Hawaiian and Southwest remain.

This is all a few years off, if then. Spokesmen for the two carriers declined to comment on the possibility of a merger. And for now, the airlines are taking small steps -- firming up management and, in the case of Frontier, heading for an initial public offering.

Last week, Frontier Airlines promoted Barry Biffle as president, CEO and a member of the board, firmly establishing Biffle, who had been president, as the man in charge. Meanwhile, at Spirit, industry veteran Bob Fornaro took over as CEO in January.

Fornaro has spoken publicly just once, on a Feb. 8 earnings call, when he said he would look at some smaller markets -- where competition from the majors is not so intense -- and enhance operational reliability, which has been lacking.

The biggest development since then for the two carriers came on March 4, when Bloomberg reported that Frontier, owned by private-equity firm Indigo Partners, hired underwriters for an IPO. Bloomberg sources named four Wall Street firms -- Barclays, Deutsche Bank, JPMorgan Chase and CitiGroup -- that are working on the IPO.

Looking ahead, Wolfe Research analyst Hunter Keay put the pieces together in a March 18 report titled "Deep Dive on a SAVE-Frontier Merger." The report outlined what a merged airline would look like in terms of deal math, fleet, network and synergies.

"We think SAVE and Frontier will eventually merge to avoid eating into each other's growth prospects," Keay wrote.

He said the carriers are poised to add 390 markets over the next six years. The danger, which could be avoided in a merger, is that they "are starting to impede on each other's territory, and worse, future growth prospects."

 

By the end of the second quarter, the market overlap will be 32 markets (or 16% of Spirit's markets), which is up from just five markets two years ago, Keay said. He said that "should hardly be a surprise given Frontier is currently being led by {Biffle}, one of the main designers, if not the main designer, of SAVE's market growth strategy."

A merger would be marketed to investors as "an attractive way to ensure a decade of uninterrupted growth," he wrote. "SAVE gets that premium valuation back by eliminating a competitor that's doing almost the exact same thing."

Keay said Frontier investors probably don't want a merger until Spirit improves "not only its operational metrics, but {also} its image. That's what Mr. Fornaro was brought in to do, we think." While Fornaro has said nothing publicly about a merger, Keay said he has done nothing to diminish the expectation.

Spirit shares traded Wednesday at $46.91. Shares are up 19% year to date.

 

 

 

 

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.