Deutsche Bank analysts believe Frontier Group Holdings Inc. (ULCC) is ideally positioned to capitalize on Spirit Airlines‘ (FLYY) recent bankruptcy filing. The analysts significantly increased their price target for Frontier stock, reflecting their optimistic outlook.
The substantial network overlap between Frontier and Spirit, currently estimated at 35% and projected to reach 40% by the fourth quarter, is a key factor in this positive assessment. Frontier plans to add approximately 20 new routes, many of which are currently served by Spirit, further increasing this overlap.
Spirit‘s bankruptcy filing, its second in recent months, is expected to lead to a considerable reduction in its operations and fleet size. This will create opportunities for Frontier to expand into vacated markets.
Frontier‘s CEO, Dave Davis, acknowledged the challenges ahead for Spirit, emphasizing the need for further strategic adjustments to ensure its future success. However, Spirit‘s downsizing is viewed by Deutsche Bank as a significant positive for Frontier.
Despite the positive outlook, Deutsche Bank acknowledged potential downsides for Frontier. A weakening economy and increasing operational costs were cited as potential headwinds. The analysts’ buy rating reflects their belief that the benefits of Spirit‘s contraction outweigh these risks.
The failed merger talks between Frontier and Spirit in November, and Spirit‘s subsequent failed attempt to merge with JetBlue Airways Corp. (JBLU), provided the backdrop for the current situation. JetBlue abandoned its merger plans with Spirit in March 2024 due to regulatory hurdles.
The low-cost airline industry faces challenges, including increased competition from larger carriers offering budget-friendly options. This competitive landscape, coupled with the economic climate, presents ongoing headwinds for airlines like Frontier.
Frontier‘s stock performance this year has lagged behind the broader market. This contrasts with the performance of the U.S. Global JETS exchange-traded fund (JETS) and the S&P 500 (SPX). However, Deutsche Bank‘s upgraded rating suggests a potential turnaround for Frontier based on the anticipated benefits from Spirit‘s restructuring.
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