Air Transat has a C$40 million decision to make. The carrier can fold into the Canadian aviation behemoth that is Air Canada; the two are in negotiations on that deal. Or it can remain an independent brand and realize its previously stated dream to integrate direct hotel ownership into its vacation packages business. Canadian real estate investor Group Mach and Spanish hotelier TM Grupo Inmobiliario want to help make that dream come true. And they’re offering a C$40 million price premium (C$1/share).
Air Canada declined to increase its bid for the company during the 30-day exclusivity period the two are currently in. Those negotiations remain ongoing. Also, the counter-offer comes with a significant hitch: It will only work if the Quebec government agrees to help fund the deal. Mach hopes to secure that funding by promising the full corporate operation would remain in Montreal. Air Canada did not commit as strongly with respect to job security in Quebec.
The idea of an airline owning the hotels where its passengers fly is hardly new. United Airlines once owned the Westin brand. SAS sold its hotels off in 2006 and ANA followed in 2007, though it maintains a joint venture with IHG for branding and operations on some properties. Other airlines, most notably Icelandair, have kept their hotel portfolio in place.
And in the package tour market Air Transat’s vertical integration vision is shared by Allegiant. That carrier’s 2017 announcement of its Sunseeker Resorts project near Punta Gorda, Florida is all about ensuring a sufficient supply of lodging for visitors flying in to the carrier’s hub. Investors remain skeptical of the plan and recent earnings calls have been testy, to say the least. With an experienced hotel operator willing to help finance the move, however, Air Transat has some advantages.
TM Groupo already operates as a preferred hotel supplier for Transat in Mexico. It will commit three hotels there and C$15 million as part of the bid. TM and Mach expect that their version of Air Transat will operate 12,000 hotel rooms within six years. The current Transat plan calls for 5,000 rooms.
Either number requires significant capital, with a long-term view on returns. That is increasingly difficult in the public equities market where quarterly earnings numbers are often favored over long-term, strategic decisions. Calgary-based WestJet faces a similar challenge as it works to transition from a regional low cost carrier to a global operator. Its fleet renewal and route expansion plans also require a longer term view. Onex recently announced a $5 billion deal to take the airline private, funding that development.
The Mach/TM deal would almost certainly face less regulatory scrutiny as it does not eliminate a competitor from the market. But the promise of keeping headquarters in Quebec is not a sure thing to secure the government investment. Air Canada is also headquartered in Montreal, though Toronto is the carrier’s largest hub.