A rival's issues could provide opportunities for Frontier Group Holdings (ULCC -0.36%). Frontier shares were up more than 25% at the open, and are still up 13% as of 12:45 p.m. ET, after the airline operator was upgraded to a buy in response to shifting market dynamics.
Image source: Frontier Group Holdings.
Spirit sinking
Frontier is an ultra-low-cost carrier, a segment of the airline sector focused on low fares in exchange for few frills. The most similar competitor in the U.S. market is Spirit Airlines, which was founded with funding from current Frontier board chair Bill Franke.
Spirit has been flying through turbulence of late. In 2022, the company agreed to be acquired first by Frontier and then by JetBlue Airways. The JetBlue deal was eventually blocked by regulators, and Spirit fell into bankruptcy. The airline emerged from Chapter 11 protection earlier this year, but flew back into bankruptcy last week to avoid a liquidity crisis.
Spirit's troubles caused Deutsche Bank to upgrade Frontier to a buy from a hold and raise its price target to $8, from $4. Analyst Michael Linenberg said that Frontier is best positioned to benefit from Spirit's bankruptcy, noting that 35% of Frontier's network overlaps with Spirit. That number should increase to 40% by year's end because of Frontier's recently announced plans to add new routes.
Is Frontier stock a buy?
The Spirit saga likely has more chapters to come. Frontier's Franke reportedly met with Spirit officials last week, raising speculation that Frontier could once again emerge as a buyer for what is left of Spirit's operations.
If so, that could add new risk and uncertainty to Frontier shareholders in the quarters to come. The macro environment also requires monitoring: Discounters like Frontier and Spirit tend to be harder hit when demand slows, leading to at times oversized reactions in their stock price.
That said, Frontier is a well-run, well-capitalized airline that is set up to grow over time. For those looking for a higher risk/reward option in the airline sector, Frontier is an attractive option for a well-diversified portfolio.
