Frontier Group Holdings, Inc. (ULCC) Earnings Call Transcript & Summary

Welcome to today's conference call to discuss the proposed combination of Frontier Group Holdings and Spirit Airlines. Today's call is being recorded. My name is Leo, and I will be your conference operator today. [Operator Instructions] A copy of the presentation that will be used during today's call is available on both companies' Investor Relations websites as well as on the new transaction website. www.evenmoreultralowfares.com. At this time, I would like to turn the call over to David Erdman, Senior Director of Investor Relations for Frontier. Please go ahead.

Good morning, everyone, and thank you for joining our call to discuss the proposed combination of Spirit Airlines and Frontier Airlines. On today's call, you will hear from Frontier Chairman, Bill Franke; Frontier President and CEO, Barry Biffle; and Spirit Airlines President and CEO, Ted Christie. Also joining us are Spirit CFO, Scott Haralson; Frontier CFO, Jimmy Dempsey; and Spirit's Senior Director of Investor Relations, DeAnne Gabel. Following the prepared remarks portion of the call, the team will be available to answer your questions during Q&A. In addition to the press release on this transaction, we also wanted to draw your attention to the earnings release issued by each airline this morning. So with that, I'll now hand the call over to DeAnne.

Thank you, David. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are discussed in both company's filings with the SEC, including each company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. These and other important legal disclaimers are covered in Slide 2 of the investor deck. In addition, this call does not constitute an offer to sell or the solicitation of any offer to buy any securities or solicitation of any vote or approval. In connection with the proposed merger, the companies intend to file a registration statement on Form S-4 containing a proxy statement prospectus with the SEC. And you should read the proxy statement prospectus when it becomes available because it will contain important information. With that, I'll turn the call over to Bill Franke, Frontier's Chairman and the Managing Partner of Indigo Partners, Frontier's majority shareholders. Bill?

Thanks, DeAnne. Look, Indigo has a long history at both Spirit and Frontier. I think it's safe to say that no one knows them better than I do. We're proud to partner with them to create America's most competitive ultra-low fare airline, and it's actually a transformative moment in the airline industry in the United States. We work jointly with the Boards and senior management teams to bring our 2 complementary businesses together. I'm confident that today's announcement will change the industry for the benefit of consumers, shareholders as well as the team members for both Spirit and Frontier and the communities we serve. Combination of Frontier and Spirit will bring more ultra-low fares to more customers and more destinations across the United States, Latin America and the Caribbean. For our best-in-industry team members represented by both airlines, they'll have better career opportunities and more stability working for the combined airline. And important to note, we will be America's greenest airline operating the youngest, most modern fleet in the United States. Put simply, we expect all of Frontier and Spirit's stakeholders to benefit from this transaction. I'll now pass to Ted to discuss the transaction more deeply.

Thank you, Bill. I share your enthusiasm for combining our 2 great companies, and I want to commend you for being such a staunch advocate of this proposed transaction. Before I begin, I want to remind you that we also announced our fourth quarter and full year 2021 earnings this morning. We are pleased with our strong results and are very appreciative of our team members for all their hard work. To our Spirit family, thank you. Turning now to the transaction. This is a winning combination. The transaction is centered around creating an aggressive low-fare competitor that will better serve guests, expand career opportunities for our team members and create value for our shareholders. Together, we will democratize air travel even further. We believe we are a perfect fit with Frontier. Our businesses share similar values, including our long-standing commitment to affordable travel. Turning to Slide 4, which provides an overview of key highlights. Under the merger agreement, Spirit equity holders will receive 1.9126 shares of Frontier common stock, plus $2.13 in cash for each existing Spirit share they own. This implies a 19% premium over Spirit's closing price on Friday, February 4, 2022, and a 26% premium over the company's 30-day volume average prices. At close, existing Frontier equity holders will own approximately 51.5% and existing Spirit equity holders will own approximately 48.5% of the combined airline on a fully diluted basis. The Board of Directors for the new airline will be comprised of 12 directors, 7 of whom will be named by Frontier and 5 of whom will be named by Spirit. Bill will be the Chairman of the Board of the combined company. The combined company's management team, branding and headquarters will be determined by a committee led by Bill prior to close. The merger is expected to close in the second half of 2022, subject to satisfaction of customary closing conditions, including completion of the regulatory review process and approval by Spirit stockholders. Frontier's controlling stockholder, Indigo Partners, has approved the transaction and related issuance of shares of Frontier common stock upon signing of the merger agreement. Moving to Slide 5. We are excited that shareholders of both companies will have the opportunity to participate in the upside potential of our combined airline. The combined company would have annual revenues of approximately $5.3 billion based on 2021 results. And once combined, we expect to deliver annual run rate operating synergies of $500 million once the airlines are fully integrated. These will be primarily driven by scale efficiencies and procurement savings across the enterprise, with approximately $400 million in one-time cost to achieve. Most significantly, we expect to deliver approximately $1 billion in annual consumer savings, a huge win, giving consumers more go. I'll now turn the call over to Barry to further highlight the transaction's benefit for consumers.

Thank you, Ted. It's been amazing to work with -- so closely with you again. For those who don't know, we worked together for a long time in a past life. And on a personal note, I spent over 8 years at Spirit and now 8 years at Frontier. So today is particularly special for me. This is a historic moment for both organizations, and I'm excited about what we can achieve together. I'll start by reminding you that we also announced our fourth quarter and full year 2021 earnings this morning. Our strong results would not be possible without the ongoing commitment and unwavering dedication of Team Frontier, and I want to thank everyone for their continued support to improve our airline. On Slide 6, you can find more information on the Frontier results in the press release, but this transaction is exciting, and it builds on the incredible progress both Frontier and Spirit have made in the past couple of years. This combination is a win for stakeholders, including Team Frontier, our customers and our communities as we bring ultra-low fares to more people and more communities. Thanks to the hard work from Team Frontier, we built a company that delivers the lowest fare for our customers, is the most fuel efficient in the industry and is also America's greenest airline. We know our industry very well and believe now is the right time to take the next step in our journey and join forces with Spirit, a company that shares our values. As a combined airline, we'll be able to expand routes with more than 1,000 daily flights to over 145 destinations in 19 countries across complementary networks. The combined airline will also have the ability to succeed in cities our companies have previously exited such as Jackson, Mississippi as well as expand into new small cities like Eugene, Oregon. As we expand service, we will also support small business growth in our communities with more frequent ultra-low fare flights.

On to Slide 7. As Barry mentioned earlier, the combined company is expected to have a strengthened financial profile. Together for 2021, we flew a combined 68 billion available seat miles. This transaction will take us from the seventh and eighth largest airlines in the United States by ASMs to fifth, enabling us to be a more effective alternative against the Big Four among others. Additionally, we are charging the lowest fare per passenger of only $54. Our all-in cost for the consumer is the lowest of any airline in the United States at $108 on average. The Big Four airlines charge over 80% more than us. When you combine this with the fact of our greater scale and our low fares, we become an even better option for consumers. Moving to Slide 8. In a competitive industry like ours, the lowest cost always wins. And we're proud to continue to deliver that for our customers day in and day out. Further, given our complementary footprint, the combined airline will be able to utilize efficient scheduling and high utilization to drive ultra-low cost. These low costs will, in turn, enable us to keep our fares low for customers. As a result, the combined airline will be poised to compete. Our single-class service, efficient seating configuration and unbundled fares will allow consumers to take advantage of affordable travel options to more communities. As the recovery progresses and demand returns, we believe the combined airline's focus on leisure travel, coupled with its ultra-low fare strategy, will position us as an industry leader. If you move to Slide 9, all of the benefits we've covered today showcase how our customers will win from this combination. In addition to providing more choices for consumers, the combined airline will offer strengthened operational reliability through a variety of efficiencies. Further, with a larger combined fleet and deepened services to cities across the United States, we'll be better positioned to improve recoverability during irregular operations. For example, take the Baltimore to Orlando route on this slide. As a combined airline, we will now offer a total of 5 daily schedule departures. This is compared to the 2 and 3 scheduled departures per day at Frontier and Spirit respectively. So now in the event of inclement weather or other challenges, our customers will have at least 2 additional ultra-low fare options to reach their destinations. The combined airline will also provide greater customer loyalty benefits building upon the existing loyalty program at each airline. Additional benefits that our customers will be able to utilize include more earn and burn options for frequent flyer program members as well as more destinations and flights available. Moving to Slide 10. In addition to our commitment to serving our customers, sustainability is at the core of each company's strategy. I'm proud to say that Frontier and Spirit will be America's greenest airline, which will save customers over $20 per seat, round trip in fuel costs, and the CO2 of over 7 gallons of fuel versus the Big Four. The combined airline will also have the youngest, most modern and fuel-efficient fleet in the United States. Through this transaction, we expect to achieve over 105 miles per gallon per seat per mile by 2025. Indeed, on Slide 11, the combined airline has over 350 aircraft on order to deliver more ultra-low fares. Together, we will feature the largest fleet of A320neo family aircraft of any U.S. airline. And our pipeline of new aircraft will ensure we continue to be a leader in fuel efficiency. As you can see on this slide, our combined fleet is expected to increase at a 12% compound annual rate to 493 aircraft in 2026 and from 283 aircraft in 2021. This represents approximately a 75% increase in our total aircraft over the next 5 years, reflecting our commitment to offering more service to more people in more cities. On to Slide 12. Not only will our customers win from our combined fleet, but the combined airline will also benefit as we drive operational efficiency throughout the company. Leveraging our sustainability commitments, over 1/3 of our modern fleet utilizes new fuel-efficient engine technology. In addition, the 350 orders I mentioned previously, will help the combined airline become even more efficient as we continue to add more A320neo family aircraft. In fact, by 2026, we anticipate that nearly 79% of our fleet will consist of A320neo aircraft, providing the airline with both operational and environmental benefits. Increasing fuel efficiency is part of our ESG goals, but it's also helpful to the P&L, especially in high fuel price environments like we are currently facing today. While higher fuel prices impact all airlines, because Frontier and Spirit tend to have greater seat density than most of our competitors, and our combined fleet is more fuel efficient, our per passenger fare would need to move up less than other competitors to more fully offset the rising cost of fuel. Turn to Slide 13, to the benefits for our team members. As part of a growing competitor in the United States, we expect that our combined team members will have better career opportunities and more stability. In fact, by 2026, Frontier and Spirit expect to add 10,000 direct jobs and thousands of additional jobs at the company's business partners. Given the growth of the combined company, it is expected that all current team members will have an opportunity to be a part of the combined airline. Not only will we create these jobs, but we anticipate the vast majority will be high-quality, high-paying union jobs, with strong career stability. On Slide 14, in summary, this is a transaction that's a win for all of our stakeholders. It means ultra-low fares for more consumers; it means more benefits to our communities; it means more jobs and opportunities for our team members; and finally, it means the opportunity for our shareholders to participate in the upside potential of America's most competitive ultra-low fare airline. As we look ahead, we're excited to unite our talented teams to increase competition in the airline industry, while also continuing our commitment to excellent customer service. Thank you for your time this morning and your interest in our bright future. With that, operator, please open up the line for questions.

[Operator Instructions] We'll take a question from Mike Linenberg of Deutsche Bank.

I guess, Ted, I want to hit you up on the $500 million of synergies that you talked about. I think you said predominantly scale and procurement savings. And when I think about the amount that, that is, and I think procurement, are you also talking about the fleet? And when I think about the fleet, I know Indigo has probably one of the best when you look at their order book, the pricing that they got, given the size is probably better than anyone out there. Is there an opportunity to sort of meet that with the Spirit aircraft order? Is that what you're referring to?

Thanks, Mike. I'll start. Obviously, Scott and Jimmy can jump in as well. But the $500 million in synergies, by the way, is at the EBITDA line. We estimate about $100 million of that is related to cost synergies. The other $400 million is really network benefits. So let me tell you a little bit about that. On the cost side, it is largely procurement scale, that sort of thing. We didn't really contemplate any aircraft-related synergies right now. But on the complementary network side, what we're really doing is, we believe, as the companies combined, as we know, finding ways to create utilization on the existing fleet, which is going to drive tremendous benefit on the P&L and, more importantly, drive a lot of benefit to consumers. That's how you actually drive the $1 billion in savings as we're able to deploy the existing fleet in more efficient ways and into more markets. So it's kind of a win-win and an easy one to kind of understand when you start thinking about having a bigger airline of scale, able to deploy that way.

We'll take our next question from Ravi Shanker of Morgan Stanley.

Follow-up on synergies as well, but can I ask you more about revenue synergies. Kind of does this change the way you guys look at the network and kind of where you fly and kind of the cities, the blue dots that overlap? Have you even quantified the revenue synergies internally?

Yes. So internally, no, we actually had independent third parties actually conduct this for us. Of the $500 million, I mean, Ted was just talking about it of EBITDA, $400 million is derived from revenue, which is the revenue is even higher than that. The biggest benefit comes from the distribution power of the 2 brands. Obviously, Spirit is very strong in the East. Frontier is very strong in the West. That's going to drive more customers onto our existing flights, which means more low fares to more people. Then as Ted mentioned, we'd have the additional utilization come in from changing the sparing ratios as well as efficiencies. That frees us up to fly to even more places and free people from the shackles of high fares. So a lot of small and midsized communities will benefit from that ability to grow more. Then you've got all the routes that, together, what we call kind of the [ but for ] that without this merger, we can make work. So these are places, and I mentioned earlier in the slide, which is places that we failed in the past or possibly together we can make this successful. But I don't know if that kind of get your questions kind of the breakdown. But again, the majority of it comes from -- of the EBITDA comes from the revenue, which is even more revenue, but you got to subtract the incremental flying costs.

Our next question is from Duane Pfennigwerth of Evercore ISI.

Congratulations. Question for Bill, if you're still on the line. How are you thinking about the combined management team here? How you're going to evaluate that? And when you'll kind of know the direction going forward?

Yes. So it's an interesting question. Obviously, we need to be thoughtful, careful in the analysis. And I've told both Barry and Ted that I am going to take my time and do it in an orderly way. They're both comfortable with that. At the end of the day, they're both exceptionally good CEOs and so it's not an easy process, but we all go through it. I don't -- Duane, I don't think there's any real urgency to the decision when we have regulatory approval pending. The airlines have to operate separately and -- during that period of time. It's important that the management teams of each of those airlines have the capacity to manage their particular base. So you shouldn't expect an answer on this until we get closer to regulatory approval.

Okay. That's great. And then if I could ask a follow-up. Can you talk about access to airports, and this is to the teams, maybe? Access to airports, what does this agreement do to give you access to slot-constrained airports that you've been historically boxed out of? Is there a particular market where kind of the combined relevance is something you're more excited about, again, relative to slot constraints and boxing you guys out?

Well, thanks, Duane. Look, I mean I think this merger is all about getting more low fares to more people and more places. And when you look at it, it's all about providing real balance and real competition to the Big Four. And the truth is, is both of our carriers, along with other carriers have just been locked out with the dominance of the Big Four in a lot of places. And this enables us the ability to take the scarce resources that we do have and use them more efficiently and provide more flights on each gate. So I suspect the combined entity will have one of the highest gate utilization in the United States, and that will provide even more low fares to more people in more places.

Our next question comes from Jamie Baker of JPMorgan.

Can you share the degree to which your unions were involved with this morning's announcement? Did they find out at roughly at the same time as the rest of us? And is the $500 million synergy target, net of any potential labor cost dyssynergies?

Jamie, it's Ted. I'll start. Obviously, this has been a confidential transaction that we work closely here to get to this point. So we did give our unions notification today, and they're aware of us working through it. As far as the labor market goes, I think both companies, as Bill mentioned, will be operating their businesses stand-alone here during this period of time, and we'll be working to the extent that we have open contracts, working with our unions on those on those contracts. Broadly speaking, this is a fantastic arrangement for the teams, broadly speaking, and including the unions. It's going to create more stability. It's going to create more opportunity. It's going to create more flexibility. There is going to be more bases. There's going to be more chances for people to find interesting places to fly. So we think this is a win across the workforce as well, and we're excited to kind of fill everyone in on that and what it's going to look like for them.

We'll take our next question from Helane Becker of Cowen.

Not sure who wants to take this. But why are you sure -- or have you talked to the justice and transportation departments yet about this? And I've had some pushback this morning from folks who don't think this will get regulatory approval. Can you just talk about your thoughts regarding that?

Thanks, Helane, it's Barry. Look, we've reached out to the administration, and we're really excited about telling them our story. I mean, this merger is completely different than any other merger in the past in the U.S. This is not about reducing competition and raising fares. This is about getting more fares to more -- low fares to more people in more places, and we're excited to tell our story to them, and I think it will be well received.

So just a quick follow-up. DOT, Hart-Scott-Rodino, do you need DOJ as well?

Yes, we will need the DOJ.

[Operator Instructions] We'll move next to Hunter Keay of Wolfe Research.

Congratulations on the announcement, everybody. Ted, I'm kind of curious what makes you feel good about selling at this price given just 3 months ago, you were reiterating the '23 EBIT margin guide of 13.5%. I would think if you thought that you could do anything close to that, that staying alone and being -- driving organic growth will be far more accretive than selling down here at this price? So has something changed over the last 3 months? Is it oil? What makes you feel presumably less good about that margin outlook that you were giving us back in October?

Hunter, good to hear from you. I don't feel less good at all. In fact, I feel even better. One of the things that's really great about this transaction is both companies are going to participate in significant upside here. So this is a largely stock-for-stock deal, and that means both shareholders participate. So we don't view it the way you described it. In fact, both of us have an objective to achieve pre-pandemic margins, and we feel like that's achievable. And when we do, the synergies are purely accretive. So I think we're going to deliver tremendous value to the Spirit shareholder in this transaction, and I know the Frontier side feels the same way.

We'll take our next question from Conor Cunningham of MKM Partners.

I would think now you're going to be the fifth largest airline, I would think loyalty is going to be a much more prominent discussion just given the size of the combined company. Just curious on how you're thinking about the opportunity set going forward? And what's contemplated in, I think you said $400 million of EBIT from revenue just from loyalty in general going forward?

Just from -- okay...

How do you want to think about it?

Yes. So look, what we said is there's $500 million in EBITDA, of that $400 million is from revenue and $100 million from cost. But to be clear, you get more than $400 million in revenue, so you'll have incremental flying that is created so it's net of the cost. That's why we actually listed it as $500 million of EBITDA. Of the $400 million, it breaks down as -- and I mentioned a little bit of this earlier, but it breaks down the largest benefit comes from distribution of the 2 brands, flyfrontier.com, spirit.com pushing together across both networks as well as the utilization benefit that comes from principally 2 things: one, the sparing ratios is inefficient in certain small places, will actually benefit more flying as a result, also from the schedule efficiency that happens in a variety of airports, where both of us maybe have an aircraft that has maybe an hour left but not enough for a flight, but together, you match the schedules together and you can get more flying. And that will be deployed into a lot of places that are new places that, in some cases, we've never served, couldn't do maybe on our own without the combination of distribution, but also in places that we, perhaps, failed in the past, but with the combined carrier, we could be successful. Then you get into the other benefits. Yes, the subscription programs as well as the loyalty program. We have not assigned a huge amount to that, but we do believe that it's going to be very powerful because consumers are going to have the access and benefits and features of both combined programs with more places to fly and more places to earn and burn, which is obviously more appealing. But we have not assigned a huge amount. The majority of it comes from, as I mentioned, the distribution and the aircraft utilization.

We'll take our next question from Andrew Didora of Bank of America.

Congratulations. I know the 2 airlines had a little bit of a different strategy in terms of their networks. I guess one, Barry or Ted, just wondering how you envision that network -- that route network evolving in the combined company? And I guess more importantly, does this change the way you think about the growth profile of the combined entity versus what you had contemplated at the stand-alone airlines?

Andrew, no, it doesn't change the view of the growth profile. I think as Barry just illustrated, if anything, it enhances it. There's plenty of opportunity today for us to pursue markets with low fares or increased density in markets where we serve today. And what this combined airline will be able to do is do that faster and more efficiently. While there are nuances to each airline's networks, we obviously are core focused on the leisure markets and serving the leisure guests and the leisure customer. And so there's still plenty of that out there, and we're really looking forward to kind of come to the goal line and then focusing on making this network home because I think there's going to be a tremendous opportunity in the combination.

We'll take our next question from Catherine O'Brien of Goldman Sachs.

On the combined network, a bit of a follow-up to Helane's question, I'm guessing the answer is no to this. But are there any airports where you expect your combined share might merit any divestitures?

Thanks for the question. I think it's too early to speculate on something like that. But we would combine -- I think you just think globally, we will only be about 7.5% capacity. And I think what's important about that is it's even smaller percentage when you consider the revenue, which gets to the point that this -- these are low-fare airlines that provide a lot of stimulation. But I think it's too early to speculate on any type of divestitures. But just as a reminder, neither one of us have large positions in many of the more restricted airports that are -- especially the ones that are slot controlled.

We'll take our next question from Chris Stathoulopoulos of Susquehanna.

So just curious if this transition from pandemic to endemic takes longer than expected and by extension to continue to see atypical or inventory patterns from U.S. peers, would you consider perhaps looking at markets that, in the past, didn't make sense or ranked lower in terms of your RASM or margin per ASM criteria?

Well, I think I'll reiterate you don't want to be anywhere than in a low-cost airline when things are tough. And so to start with, over the last 2 years, this has been a comfort zone for both of us. So -- but in the instance that you provide where, perhaps, the pandemic stretches on longer, I don't think -- we'd make the same evaluation we make at any given point, which is we look at the market opportunity, try to determine whether or not it fits within our profile and pursue it. I think, here at Spirit, we've done that. We've flexed the network quite a bit over the course of the pandemic up and down and into new places, and that was an attempt to kind of find the demand where it was. And I think that's worked okay for us. And I know Barry would feel the same way.

We'll take our next question from Savi Syth of Raymond James.

My follow-up first, actually, just going on the questions that have been asked. I know this is something that both teams have looked at before. So I was curious why now in terms of kind of executing going forward with this?

Savi, so again, this -- the focus here is on how accretive this transaction is for the consumer and for our guests and for our team and for the shareholder. And there's nothing particular about timing in there. Once you look at it, and you start understanding what it really does drive for both sides, it becomes obvious to all of us that this is a very complementary transaction with the same fleet types, same business model, a lot of benefit that we think we can drive. And so we'll -- we're excited about it. I wouldn't say that there's anything kind of like special about the timing other than we're just glad to be on the rope.

That's helpful. And if I might just ask a little bit more of a shorter-term question in terms of what you're seeing in the environment today? I know you're not holding any earnings calls. I was just curious if you had any commentary on kind of the current environment?

Yes. I think -- this is Ted, by the way, on behalf of Spirit. I think we would say that not surprisingly coming out of the New Year, the Omicron surge was probably in full bloom. And so January and the early part of February, were tough. But what was interesting to see was the rebound in booking activity and demand as we head into the middle part of this month and into the spring, which gives us a good feeling about how things are going to look heading into the summer. And I think it points to, perhaps, a much more resilient consumer base than earlier on in the pandemic. They're willing to kind of move through these things and get on to next, so I think that's encouraging signs.

This is Barry, on the Frontier side. We've seen very similar situation. I mean, obviously, the Omicron had some damage to the holiday periods and so forth. But we've seen for several weeks now, as you can see in the public booking data on kayak.com and other places that, that every week, we continue to see improvements. And so obviously, everyone's kind of [ ATL ] booking curve is needing to reflate, but we're really optimistic about the spring given what we're seeing. And like Ted said for Spirit, we're really excited about the summer. I think it really does point to how resilient the consumer is. And you can see the leisure man really starting to percolate. So we're excited about the year.

We'll take our next question from Dan McKenzie of Seaport Global.

Congratulations you guys. With respect to the growth opportunities that you've highlighted, can you speak to the return metrics that are going to guide the combined airline? As you look ahead, is there a pretax metric, return on invested capital? And then related to this, can you speak to the leverage metrics that you're targeting once the airline is fully merged? And how -- what the right leverage metrics are for the longer term?

Dan, it's Jimmy Dempsey here. The 2 businesses have been focused on getting back to pre-COVID margins. That's certainly in our thoughts going into 2023 and 2024 and beyond. That really determines the overall return in the business. We're very excited about getting the business back up fully operational as we progress through this year and move on from this latest Omicron surge. And I think you'll see significant cash flow generation built off the business over the coming years as you see the full extent of the recovery.

And then the leverage metrics that you're targeting once merged and fully merged and longer term?

This is Scott Haralson. Yes, I think Jimmy touched on some of the return stuff, but I think you'll see the business together from a leverage perspective will be a bit better than both entities as we head through so the 2023, '24, '25 as we get integrated. But I think we're going to focus on ROIC. We're going to focus on bringing back op margins to where they were pre-COVID. And then the other components of the balance sheet, I think, will take form, as Jimmy mentioned, as the cash flow component of the business will be pretty considerable as we get integrated.

We'll take a question from Myles Walton of UBS.

I was wondering if you could talk to the $400 million cost to achieve in terms of buckets of spend there, and maybe it seems relatively high relative to the cost synergy savings of $100 million? And then can you just confirm, I think you said '24, '25, is when run rate synergies are there. Is that also ratably at the time through which you spend?

Sure. Sure. Again, the $400 million of the $500 million of EBITDA is derived from particularly consumer benefits of flying more people to more places, which is driven; number one, largest by distribution benefit as well as the additional utilization that came from freed-up aircraft and more efficiencies. But we have deducted the cost to achieve that incremental flying, so incremental fuel, labor cost, airport costs against that. So that is a net number, that is an EBITDA number. And all of this is going to be phased in, obviously, over time. We start getting benefits almost immediately from the distribution once we have closed and the transaction closed, but it will take a total of a few years to get everything flowed through the operation.

Sorry, just a clarification. I think the $400 million is cost to achieve through restructuring and other expenses. Is that...

Restructuring of the cost. So Jim, you want to walk through the cost?

This is Bill. You could imagine how focused we are on the synergies and how motivating we will be with management around the opportunity. And synergies tend to be a misused concept and transactions. I don't want that to be the case here. I want these to be real.

And Myles, just this is Jimmy Dempsey here, just to give you an insight into the cost of putting the synergies in place and integrating the companies. We spent a little bit of time on trying to understand what needs to be done over the coming years. And so we've been very conscious of ensuring that we've retained the 2 airlines operating over the next period until closing. And so we put a significant retention plan in place across our salaried employees. We've clearly got some public company costs that will exist. And then we're looking at the rebranding of one of the airlines and the headquarters location putting structures around that, that will drive costs as you integrate the 2 companies over time. But that's what that builds up to the [ $400 million ].

This does conclude our question-and-answer session as well as our conference call for today. You may now disconnect your lines. And everyone, have a great day.