Air Canada to acquire Air Transat

Canada’s largest airline wants to get a little bigger. Air Canada entered into an exclusive agreement with Transat A. T. , parent of Air Transat, to combine the two companies. Air Canada is offering C$520mm for Transat, or C$13/share, a 26% premium over Wednesday’s closing price of C$10.28. The deal would keep Transat headquartered in Quebec, with Air Canada promising in its announcement that the deal will “benefit all stakeholders.” The overall benefit to passengers – typically not included as stakeholders in such transactions – remains to be seen, though Air Canada CEO Calin Rovinescu tries to assuage those concerns in announcing the deal.

A combination with Transat represents a great opportunity for stakeholders of both companies.  This includes the shareholders of both Transat and Air Canada, employees of both companies, who will benefit from increased job security and growth prospects, and Canadian travellers, who will benefit from the merged company’s enhanced ability to participate as a leader in the highly competitive leisure travel market globally. The acquisition presents a unique opportunity to compete with the very best in the world when it comes to leisure travel. It will also allow us to further grow our hub at Montréal-Trudeau Airport, where we have added 35 new routes since 2012 to the benefit of the Montreal and Quebec communities, and from which we carried 10 million customers in 2018 alone.

– Calin Rovinescu, President and Chief Executive of Air Canada.

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The deal remains subject to finalization of the negotiations, due diligence, shareholder approval and – perhaps most challenging – regulatory approval. The press release focuses heavily on the companies’ combined presence in Quebec and the intention of keeping control of Transat in the province. In many ways it reads like a sales pitch to the government as much as to shareholders. As the largest (by far) operator in the country Air Canada can see the challenges the deal faces. Air Canada anticipates completing the transaction with cash on hand, avoiding financing requirements.

Why this, why now??

The timing of this deal is almost certainly influenced by Monday’s news of WestJet’s private equity deal. And the motivation for the tie-up in general likely is, too. The Transat operation should blend well in to the Rouge and Air Canada Vacations operations. It gives Air Canada the opportunity to expand its low cost offerings into new markets or to strengthen existing markets while reducing competition in some areas, such as the London market.

The deal could also be seen as a defensive measure against a revitalized WestJet operation. That company’s western focus could be significantly bolstered by adding the Quebec-based Transat to the fold. And WestJet’s Swoop LCC subsidiary could absorb the Transat operations similar to Rouge’s capabilities. While the combined Air Canada/Transat operation extends dominance in the Canadian market a combined Transat/WestJet would bring more balance to the competitive landscape.

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Regulatory battles ahead

That competitive landscape is a hurdle the proposed deal will almost certainly face with regulators. Air Canada spends half its release talking up the dedication to Montreal and Quebec as its corporate headquarters, a large employer and a major carrier of passengers. The company also promises to maintain the “high-quality head office jobs” in Montreal as part of the deal. As the city is losing aviation jobs related to Bombardier’s recent moves such promises are surely welcome. That the carrier is so aggressive in pushing them makes one wonder about the overall government tolerance for reduced competition, especially in the international tourism markets.

Indeed, one of the first government officials to comment on the potential tie-up, Quebec’s Premier and Transat co-founder François Legault, suggested that he would seek specific guarantees from the airline as part of the process.

We are in discussions right now with Air Canada to put a ceiling on prices that are charged for domestic flights within Quebec. I have the intention — because they have a monopoly situation — to have a discussion with Air Canada to make sure they only make a reasonable profit on these flights.

– Quebec’s Premier and Transat co-founder François Legault

Canada has resisted increased foreign competition somewhat successfully (i.e. limited ME3 frequencies) and relatively high taxes and passenger fees have kept other LCCs such as Norwegian at bay. Those sands are shifting, however, and it remains to be seen if consumers and the government will allow the consolidation as announced.