The stock market opened the new week on a positive note, with investors seeing some continued volatility but ending up pleased with the market's advance by mid-afternoon. As of 3 p.m. ET, the Dow Jones Industrial Average (^DJI -0.11%) was up 180 points to 35,269. The S&P 500 (^GSPC 0.02%) climbed 12 points to 4,513, and the Nasdaq Composite (^IXIC 0.10%) picked up 26 points to 14,124.
Falling stock prices often tempt companies to enter into strategic acquisitions, and the latest pair of companies to decide on a merger came from the airline industry. Specifically, Spirit Airlines (SAVE -2.90%) and Frontier Group Holdings (ULCC -5.36%) made a move that lifted both of their stocks. Indeed, even with the impact on the competitive environment across the industry, most of the two companies' airline peers also moved sharply higher. Below, we'll look more closely at what helped the industry move higher on Monday and why Spirit and Frontier's competitors aren't necessarily going to get hurt from the deal.
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A big partnership in the skies
Shares of Spirit Airlines were up 18% in mid-afternoon trading after the Monday morning announcement. Frontier shares rose more than 4%, which is somewhat unusual for the acquiring company in a tie-up.
The combination will produce a company with a market capitalization of roughly $6.6 billion. Putting the two route maps together will produce an industry player that will be the fifth largest in the U.S. airline industry, serving more than 145 destinations in the U.S., Latin America, and the Caribbean. Service expansion should help boost schedules to underserved markets in the U.S., and the two airlines see greater fuel efficiency helping to produce savings of $1 billion for customers.
Under the terms of the deal, Spirit shareholders will receive $2.13 per share in cash plus 1.9126 shares of Frontier stock for every share of Spirit stock they own. That puts a value of $2.9 billion on Spirit, which would give Spirit shareholders in the aggregate a slightly smaller position in the combined company than Frontier shareholders will retain. Frontier will get seven members out of 12 on the new board of directors. The companies hope to close the merger in the second half of 2022.
Are more deals coming?
Given that the combined Frontier-Spirit would be a competitive threat to the rest of the airline industry, it would be natural to think that shares of those other airline stocks might be moving lower. However, the opposite was the case.
Among the big four airlines, stocks were uniformly higher. American Airlines Group (AAL -2.18%) was the biggest gainer with a 6% rise, followed by United Airlines Holdings (UAL -2.52%) and its 5% upward move. Delta Air Lines (DAL -2.62%) gained 4%, while Southwest Airlines (LUV -0.54%) was the weakest player but still picked up 3%.
Moreover, some of the smaller carriers gained ground apparently on speculation that they might soon need to make deals of their own. Alaska Air Group (ALK -1.89%), JetBlue Holdings (JBLU -3.12%), and Hawaiian Holdings (HA -3.72%) were all up between 4% and 5.5% on the day.
With lingering pressures on the travel industry, combining resources could be important for airlines' survival. Moreover, bringing together complementary companies could help boost efficiency and make the airline sector more profitable. That's why the Frontier-Spirit merger isn't likely to be the last strategic move investors will see in the airline space in 2022.
