Air Canada, Transat finalize merger plans

Air Canada’s plans to acquire Air Transat moved forward this week, with the two companies announcing conclusion of a definitive agreement for their combination. The news comes six weeks after they executed a letter of intent to pursue such discussions exclusively. The deal is priced at CAD$13 per share, valuing the transaction at CAD$520 million overall. The companies expect the deal to close in early 2020 following regulatory approval and other customary closing conditions. Transat CEO Jean-Marc Eustache expressed optimism with the announcement, hoping to assuage concerns of future customers, stating that they “can continue booking their flights and packages with complete confidence, as all bookings will be honoured before and after the closing of the transaction.”

“We are delighted to have reached this definitive agreement to combine Transat with Air Canada to achieve the best possible outcome for all stakeholders. For shareholders of Transat and Air Canada, this combination delivers excellent value, while also providing increased job security for both companies’ employees through greater growth prospects. Air Canada intends to preserve the Transat and Air Transat brands and maintain the Transat head office and its key functions in Montreal.  … Travelers will benefit from the merged companies’ enhanced capabilities in the highly competitive, global leisure travel market and from access to new destinations, more connecting traffic and increased frequencies. The Quebec economy will derive maximum advantage of having a Montreal-based, growth-oriented global champion in aviation, the world’s most international business. – Calin Rovinescu, President and Chief Executive Officer at Air Canada

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The combined operation consolidates significant market share for the leisure and package vacation businesses under the Air Canada umbrella. It will not, however, immediately result in a boost to Rough or the Air Canada Vacations groups. Rather than combine Air Transat’s operations into those brands the company will continue to operate them separately, at least for now. The separate branding may provide the appearance of a competitive environment but the single operation will ensure that’s no longer the case.

Read More: Choose your own adventure: Air Transat edition

The company will increase connecting traffic across the brands and potentially expand more quickly into new markets. That may come at the expense of competition on routes where the two carriers both operate today, despite the promise of “increased frequencies” as part of the announcement. History has shown that such increases are rare following the merger of competitors.

The deal was unanimously endorsed by the Board of Transat and believed to be the best value option for the company’s shareholders. This comes even as Transat had a second offer on the table at a $14/share price. That offer, from a real estate and hotel development syndicate could have delivered a boost to the package tour operations; owning 12,000 hotel rooms in destination markets offers significant potential to the company. But the offer came with many conditions around the financing. Air Canada has the cash on hand to complete the transaction today. The companies did leave open the potential for a higher bid to be reconsidered, though that would need to come fully funded rather than as a theoretical play.

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Calgary-based WestJet will also see an ownership change 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. That deal received regulatory approval earlier this week, though at a 15% discount to the original price, thanks to uncertainty around the future of the 737 MAX that makes up the core of WestJet‘s single-aisle fleet renewal and expansion efforts. Air Canada also plans significant expansion with the 737MAX, including in transatlantic markets where it competed with Air Transat.

WestJet also received approval from Canadian authorities for its Joint Venture operations with Delta Air Lines this week. Approval from the US DoT remains pending.