Spirit AeroSystem Holdings (SPR  ) and Frontier Group Holdings (ULCC  ), the two largest low-cost airlines in the United States, announced that they would be merging. The combined entity would be the fifth-largest airline company in the nation and would be valued at approximately $6.6 billion.

After the merger, Frontier would control about 51.5% of the company with Spirit owning the other 48.5%. This essentially gives Spirit stockholders a 19% premium to Friday's closing price. The low-cost airline business is particularly tough, and it's even tougher in this environment where we are seeing demand fluctuates with the coronavirus and airlines are having difficulty finding labor. In addition to rising labor costs, airlines also have to deal with rising oil prices which are also likely to erode margins.

In a statement, Spirit President and CEO Ted Christie said: "This transaction is centered around creating an aggressive ultra-low fare competitor to serve our guests even better, expand career opportunities for our team members and increase competitive pressure, resulting in more consumer-friendly fares for the flying public."

The boards of both companies approved the deal over the weekend, and it's the largest merger since Alaska Airlines (ALK  ) combined with Virgin Air in 2016. Interestingly, both companies' share prices were higher, indicating that investors think it's value-accretive.

So far, no announcement has been made of the new name for the combined company, its CEO, or the location of its headquarters. Those questions will be answered by a committee led by former Frontier Chairman Bill Franke after the transaction closes, which is expected in the second half of the year, pending regulatory and shareholder approval.

Both Spirit and Frontier have performed better than their larger competitors as travel to vacation destinations and regional routes has rebounded much quicker than business travel and international travel. Both companies have also expanded its route network in recent years and used low-priced to gain a foothold with price-conscious travelers.

Currently, both Spirit and Frontier are projected to become profitable and cash-flow positive next year. Both stocks are slightly cheaper than the S&P 500 (SPY  ) based on their forward multiple. There will certainly be a rebound in terms of more travellers, but the major challenge will be rising labor and fuel costs.