Are Budget Airline Mergers on the Horizon?

by Josh Lew
Last updated: 3:00 AM ET, Thu January 7, 2016

The American Airlines-USAirways coupling was the last major merger in the airline industry. The number of US legacy carriers can't really get any smaller (at least not in our lifetimes). However, the merger of Southwest and AirTran showed that even low cost carriers are willing to consolidate.

USAToday declared the era of airline mergers over when USAirways took its last official flight in October. Ironically, US Airways was the one that started off the modern merger movement in 2005 when it partnered with America West.

Where will the next mergers come from?

The next noteworthy merger will probably come from the low-cost carrier sector. AirTran and Southwest were the first, but others could soon follow. There are already rumors swirling about who will be next.

Some members of the travel media thought it was significant that Spirit Airlines replaced outgoing CEO Ben Baldanza with Robert Fornaro, who was at the head of AirTran when it merged with Southwest. Baldanza was a vocal opponent of any kind of merger.

Why mergers make sense for ultra-budgets

There are other reasons that Spirit could indeed be part of the next major merger in the U.S. The airline has been profitable, but its shares have fallen over the past year. Other low-cost carriers have found themselves in similar positions with their shareholders. There have been rumors of a merger between Spirit and Frontier for a couple of years already. Frontier, which is still privately held (but reportedly considering an IPO in 2016), is not affected by investor fears, so it has escaped the Wall Street troubles that Spirit is dealing with.

Frontier CEO Barry Biffle was actually a former Spirit exec, so he already has a connection to the company.

Merging to find a new edge over the competition

The biggest reason for this or other ultra-low-cost airline mergers (perhaps involving Allegiant Air) to go forward is that legacy carriers have made moves to negate the advantages that low-cost carriers currently have. Delta, for example, has been testing the idea of a "basic economy class" fare. Other major carriers may be following suit.

The idea of the "basic economy fare" is that it will offer no-frills service and charge fees similar to Spirit and Allegiant. These fares would only be offered on routes that compete directly with low cost carriers. They would cancel out the price advantage that Spirit has over legacy carriers.

The solution, for ultra-budgets, would be to increase the number of routes and destinations by joining forces with carriers that have a similar business model. This would increase reach and decrease competition. Also, it would show shareholders that Spirit and its peers are not content with the status quo.

For now, all this is speculation. However, as legacy carriers change their strategies for how they compete with LCCs, Spirit and its peers may be forced to join forces if they want to stay relevant in the airline industry.

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