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Merger Derailed between Air Canada and Air Transat: What Happened?

European Regulators failed to approve the Air Canada and Air Transat merger while Air Canada seeks around $400 million in emergency funding to stay afloat.

Air Canada and Air Transat announced Friday that a proposed merger had been mutually cancelled. The deal would have seen Air Canada acquire the other airline. CBC.

On January 29, the Canadian government restricted the movement of airlines by halting flights to Mexico and the Caribbean. The tough stance on restriction and quarantine rules has airlines in a situation that they cannot control. Transat had to return some leased planes, cut its schedule, and renegotiated its contracts with its suppliers.

In my 2019 article, I detailed how Canadian airline consolidations could be hurtful to consumers. However, this was true during a time when the worldwide economy was not suffering. Furthermore, the period was not experiencing a medical emergency and a soft economy where many passengers are hesitant to fly.

What has happened since 2019?

Air Canada acquired Air Transat in an exclusive definite agreement for $520 million.

In October 2020, that agreement was modified due to COVID-19 for $190 million, slashing its premium by 72%.

As the acquisition process went on, the commercial aviation industry went through a process of rapid transformation triggering all sorts of red flags. Having no passengers amid COVID was every airline CEO’s worst nightmare becoming reality. Valuations and economic indicators were thrown through the window.

Government work shifted into triaging the most important work to the forefront leaving all non-essential work into undefined terms. Among them was the regulatory approval of Air Canada and Air Transat.

The approvals came with many strings attached

It wasn’t until February of this current year that Transport Canada had a say.

Although Transport Canada wasn’t a champion in the acquisition of Air Transat (as mentioned in 2019); it had a change of heart or as I called it “A COVID heart-to-heart.” If the home regulation agency can’t approve an acquisition then it is downhill from there.

However, it did so knowing that if they didn’t they could have an industry collapsing on their hands.

They weighed the options against an uncertain future and the government’s hawkish stance towards quarantine. Transport Canada had to make the following statement acknowledging the uncertainty of the current time:

“It cannot be assumed that Transat, as an independent entity, would retain the ability to offer the same level of connectivity and competition to Europe following the pandemic that it did when the Proposed Transaction was first announced. Thus, rejecting the Proposed Transaction would not necessarily serve to mitigate the loss of competition identified in the PIA and in the Commissioner’s initial report because much of this service could be lost anyway, including the 29 routes that Transat previously operated overlapping with Air Canada, and 17 standalone routes.”

Transport Canada, Explanatory Note on the merger between Air Canada and Air Transat and the Impacts of COVID-19.

Additionally, several demands from Transport Canada were imposed:

In any of the 31 routes given by the merger the competition can:

  • Use the Maple Leaf Lounge (Air Canada’s Lounge).
  • Use the Aeroplan Frequent Flyer Program.

I may understand the usage of the lounges but a competitor using another airline’s frequent flyer program? That’s a new one for me.

That isn’t all from Transport Canada

For Air Canada to gain efficiencies in the merger, they would have to wait at least 5 years. That was Transport Canada’s condition for the Transat Headquarters in Quebec, and use the brand for that period of time. There was a requirement of maintaining at least 1,500 employees to conduct the combined nature of the travel business between the companies.

Furthermore, Air Canada needed to renegotiate the contract with their maintenance operators AAR and Aviator to perform all overhaul maintenance for all Air Canada airframes tied to the Airbus A330, A320 family, and A220 aircraft. Maintenance is done in the newly constructed facilities in Quebec, not in Montreal.

This will give Air Canada the headache along with its maintenance suppliers of getting capital-intensive funding of new facilities in Quebec, piercing the veil of fusing the operations as soon as it was permitted.

Some other realistic demands were the divesture (selling off) of international routes.

Europe throws a curveball to the Air Canada and Air Transat merger agreement

If Transport Canada went out of its way to accommodate Air Canada, the European Commission certainly saw that as a threat in this new reality. In late March, EU antitrust chief Margrethe Vestager said Air Canada offered insufficient concessions to address competition concerns.

That was the drop that overflowed the glass for Air Canada. The airline decided to pull out from the acquisition, and paying a termination fee of $12.5 million.

While Quebec Economy Minister Pierre Fitzgibbon said the provincial government “will not leave Transat without support” effectively leaves the airline without a security blanket.

Let’s be mindful here, Air Transat destinations are mostly in Europe along with Air Canada. Making the European Commission part of their decision to merge. The new company would have control of 60% of Atlantic Travel and 35% of sun-seeking destinations within Europe. The European Commission thought the merger would deteriorate and transform a duopoly to a monopoly.

The future of Air Transat is Uncertain

Photo: Air Transat

Author’s Opinion

While Air Transat looks for stopgap measures the irony of this could not be more overstated. Transport Canada looked at the situation pragmatically even though they weren’t avid fans of the acquisition. That tells of the uncertain future the airline industry is undergoing.

Even as the United States is thinking of a return to flight and possible international destinations, it is important to be mindful that other countries aren’t on the same footing as us.

Here’s an example of how our neighbors in the North are dealing with the airline industry. While we give our brethren all our support and best wishes, it really is a tale of what would happen if the United States had declared an airspace closure. We could have shared the boat with Canada in that regard, I’m glad we didn’t.

However, it shows us what the industry requires is the strong participation of the flying public and help from the government. Air Transat is in limbo now, with options running out. Whether Air Transat gets emergency funding is up to investors and the Provincial Government of Quebec and the Government of Canada as a whole. It’s too early to know the ending, however, Canada has played a part in Air Transat being where is today.

The European Commission always baffles me. What sort of expectation was EU antitrust chief Margrethe Vestager looking from Air Canada when we all know there aren’t many remedies to be given as Air Canada per see isn’t flying. The State of Air Travel faces its most delicate moment.

If the tables were turned and for a moment the situation was about a European airline which Transport Canada denied, what would the EU commissioner do?

Bottom Line

I think the European Commission didn’t think of the consequences and protected their interests along with consumers. If it were during normal market conditions I would applaud the decision, however, we aren’t in a normal market condition.

Only time will tell if it was the correct decision.

What do you think about the Air Canada and Air Transat merger derailment? You can contact Alex Martinez Rivera below.

Captain Jetson news reporter and aviation analyst aviation analyst Alex Martinez Rivera
Alex Martinez Rivera

Alex Martinez Rivera is the Senior Aviation Contributor for Captain Jetson. Ask questions or connect with him about aviation, aerospace, business, or government via email, Twitter, or LinkedIn.

Featured Image: Air Canada.

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