The biggest wild card Frontier and Spirit face in clearing $6.6B tie-up

A $6.6 billion tie-up between ultra-low cost airlines Frontier (ULCC) and Spirit (SAVE) could create the fifth largest airline in the U.S. after the "Big Four" airlines so long as antitrust regulators don't derail the deal.

“None of these things are a slam dunk,” New York University Law School and University of California Berkeley Law professor, and former U.S. Justice Department chief economist, Daniel Rubinfeld, said of airline mergers. “... This is a very important industry for a segment of our population.”

The biggest wild card is the unknown approach of the Justice Department's still understaffed antitrust division under Assistant Attorney General Jonathan Kanter. While the Biden administration's Justice Department has promised to broaden antitrust enforcement, it's focused largely on Big Tech so far.

Still, Carl Hittinger, a senior partner with Baker & Hostetler’s antitrust group, has already seen an uptick in antitrust scrutiny in his own practice. "I don't think this is just talk. What we're seeing is a lot of action...I think they mean business," he said.

While the Biden administration will be sure to scrutinize the mega-deal, experts say it likely won't raise major red flags for regulators because certain aspects of it could benefit consumers. Those benefits could include more low-cost routes.

Still, the Justice Department and possibly the Department of Transportation will want to ensure the deal doesn’t instead increase fares, especially along city-to-city routes that both airlines service such as Denver and Atlanta and Orlando and Boston, according to Rubinfeld. The combined company's expanded control over those routes could be viewed as too dominant, says Rubinfeld, who advised United Airlines (UAL) and Continental Airlines on a merger that the Justice Department ultimately cleared.

The administration could also task the Federal Trade Commission with reviewing the merger, particularly if it anticipates the new company's strong foothold over certain routes will raise prices.

"Airlines are really consumer oriented, in a big way, and the pricing is right up the FTC's alley," Hittinger said.

University of North Carolina associate economics professor Jonathan Williams agrees that regulators are most likely to zero in on overlapping routes. “I think that's where you're going to want to think about calculating market shares,” Williams says.

In markets where both are present, the question regulators may ask is: Would merging the companies account for a large fraction of that particular market?

Overall, the combined airline would not account for a major part of the U.S. market. Based on pre-pandemic, 2019 data from the U.S. Bureau of Transportation Statistics, the combined entity would hold just a fraction of the market share for U.S. passengers at approximately 6.3%.

In a joint press release from Frontier and Spirit, Ted Christie, Spirit’s president and CEO, described the merger as “centered around” competitive pressure to result in more consumer-friendly fares. The airlines went on to project $1 billion in annual consumer savings, including increased access to ultra-low fares.

Fare price is not the only competition factor that needs to satisfy regulators, though. As Daniel Gifford and Robert T. Kudrle write in their 2017 University of Minnesota Law Journal article, legacy airlines compete largely in other dimensions like loyalty programs and on-board entertainment.

One major airline, Southwest, evolved from a low-cost, no frills carrier, to one that's become a member of the Big Four by offering a robust frequent flier program and established airport hubs, Williams pointed out.

"As these guys get bigger, things like frequent flyer programs, this type of stuff, become a bigger deal to people as you can fly to more destinations with that carrier," Williams said.

Nonetheless, he argues that pro-competitive synergies touted by the companies, such as expansion into additional markets and savings generated by fleets of similar aircraft, could encourage antitrust regulators to steer clear of a challenge. “Historically when Frontier or Spirit enter a market there are pretty big positive changes [for consumers],” he said.

Ultimately, Rubinfeld suspects the pro-competitive analysis to weigh in the companies' favor if their representations hold true. “If what they’re saying in the press release holds up under serious analysis, and they can deal with these particular overlaps," he said, "I think the deal is likely to go through.”

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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