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Airline Stocks: Here’s why Frontier stock is rallying 20% on the day that JetBlue and Spirit agree to merge

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JetBlue Airways Corp. may have won the tug-of-war for ultra low-cost Spirit Airlines Inc., but investors are seeing plenty of upside for Frontier Group Holdings Inc., with shares of the former Spirit suitor rallying on Thursday.

Frontier
ULCC,
+16.19%

stock jumped more than 20% in midday trading, on track for the highest close since Feb. 28 and the largest one-day increase for the stock on record. The company became public in April 2021.

Earlier Thursday, JetBlue
JBLU,
-2.44%

and Spirit announced they have agreed that JetBlue will acquire Spirit in a $3.8 billion deal, ending a protracted battle for the ultra low-cost airline, with the prize being a chunk of the booming leisure air travel market. That pent-up demand for domestic and “destination” flights has emerged with the end of pandemic-related travel restrictions.

The termination of a Frontier-Spirit merger proposal “removes the risk of a protracted regulatory approval and integration process (typically 3-5 years for airlines),” Cowen analyst Helane Becker said in a note Thursday.

In addition, Frontier was one of the most shorted among U.S. airline stocks, so “we expect there also may be some short covering that will further add to the shares,” Becker said.

Spirit is slated to pay Frontier a $25 million break-up fee, and a Spirit shareholder vote on the new merger agreement with JetBlue is expected to take place in the next couple of months.

“Given the outcome of the Frontier-Spirit merger vote following JetBlue’s offer, we suspect there is little risk in getting the necessary (shareholder) approval,” Raymond James analyst Savanthi Syth said in a note.

The airlines will continue to operate independently until regulatory approvals, Syth said.

The merger announcement ended a saga that started in February with Frontier and Spirit announcing their deal, with JetBlue coming in with its own offer in April. Spirit shareholders delayed the vote four times but ultimately voted down the deal with Frontier late Wednesday.

The merger would create the U.S.’s fifth largest airline by market share, with a market share between 7% and 8%, and dethrone Alaska Air Group Inc.
ALK,
-1.22%
,
according to the government statistics.

The new JetBlue-Spirit would have a combined base of 77 million customers and a fleet of 458 aircraft, Jetblue has said.

Shares of Jetblue have lost 42% this year, while shares of Frontier are down 1%. Spirit shares are up 16% so far in 2022.

Their performances compare with losses of 15% for the S&P 500 index
SPX,
+0.71%

so far this year and of 18% for shares of the U.S. Global JETS ETF.
JETS,
-0.66%

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