Nearly two years after initially announcing their intentions, and following significant renegotiations of the terms owing to COVID19, Air Canada and Transat received approval from the Canadian government this week to close on their merger. As with many similar transactions the deal includes a number of conditions. These include slot divestitures, common among airline deals, but also touch on passenger-focused travel factors such as the loyalty program and lounge access. On the business side they also include requirements regarding maintenance contracts, employment levels, and office locations.
The COVID-19 pandemic was a key factor in the final assessment of whether or not the Proposed Transaction would be in the public interest.– Transport Canada
A COVID Change of Heart
The Canadian government was not always so keen on approving the transaction. But in the face of dramatically reduced demand owing to the global pandemic regulators reconsidered their options. Because of ongoing losses and an unclear recovery path financing for airlines is uncertain. This forced Transport Canada’s hand, with the agency acknowledging the altered landscape:
[I]t 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.
The carriers’ largest competitor, WestJet, is not swayed by the change in circumstances, with CEO Ed Sims issuing a statement calling the deal “a serious setback to Canada’s economy.” Sims believes that Canadians “will face fewer choices and higher fares” as a result of “cosmetic remedies” that are inadequate to protect consumers. It is worth noting that WestJet could qualify for some of the “new entrant” benefits described below for a number of competitive routes.
The conditions appear more focused on political goals, if not necessarily preserving airline competition in the leisure markets Air Transat served.
Jobs, jobs, and jobs
Want to close the Transat HQ to realize staffing efficiencies? That’s going to require at least a five year wait. The ruling requires that the Transat headquarters remain in Quebec for at least five years. It also requires that the Transat brand remain in use.
For two years the companies are required to maintain a minimum staffing of 1,500 employees “exclusively in the conduct of the combined leisure travel businesses” of the airlines. Given the Montreal headquarters this will likely see most of these employees remain in that province.
Finally, the company is required to negotiate with Canadian maintenance operators AAR and Avianor to ensure that “all airframe overhaul maintenance for all Air Canada and Air Canada Party Airbus A330, A320 family and A220 aircraft” is performed at newly constructed facilities in Quebec.
New Routes, New Competitors
Air Canada must also launch five new international routes within five years of the deal closing. This is not a huge undertaking for the combined companies, but it shows that regulators want to ensure passengers realize the promised benefits of expanded travel options thanks to the economies of scale the merger delivers.
The deal also provides significant access opportunities to new entrant competitors, well beyond the slot divestiture requirements common in the US market. Rather than simply specifying a token number of slots at key airports in Canada the regulators identified 31 routes where, should a new competitor wish to enter over the next 10 years, Air Canada must provide the necessary operating slots. Heathrow airport in London is excluded, but many other airports where Transat and Air Canada both operated previously are included. The number of slots also maps to prior combined operations. Montreal-Paris could see up to double daily service facilitated through the process, while flights to Bordeaux would only secure one weekly Summer departure from Montreal under the deal.
Lounges and Loyalty
In addition to providing the necessary slots to facilitate international competition Air Canada must also make its lounges and loyalty program available to new entrants upon request. But there’s a catch. The access applies only to passengers on the route in question.
At Montreal, Quebec City, and Toronto Air Canada must provide – on commercially reasonable terms – access for a competitor to use the Maple Leaf Lounge for its passengers, assuming they are flying on one of the 31 routes where access is facilitated through the merger agreement. Similarly, Air Canada must allow accrual of Aeroplan points – again on commercially reasonable terms – for flights on the routes. And while the lounge access option is nice, the loyalty program play is a strange one.
As a new entrant it would be unusual to depend on a competitor’s loyalty program in general. But it is even more uncommon to offer access to the competitor’s program only on the specific route(s). While the new carrier might attract a few extra passengers by allowing them to still earn points in their primary program the goal of the programs is to generate loyalty to the brand. And generating loyalty to a different airline with which there is no broader relationship is not typically how loyalty program managers would want to structure their value proposition.
Perhaps the good news for any new entrant competitor is the glut of wide-body aircraft available from lessors currently. That is countered by slack demand and an uncertain industry recovery timeline, of course. But the cost of entry is not nearly as bad as it would have been just a couple years ago when the deal was first proposed. Could Flair pick up some used Norwegian 787s to go with its growing fleet of 737 MAX planes and try its hand at transatlantic service? Why not?? That’s just one of the potential crazy options that could come out of this ruling.
And WestJet could also put some new city pairs in play. The government defines a new entrant as “an airline proposing to increase or introduce new direct scheduled passenger air transport service on a Relevant City Pair…” So long as it is a new route for WestJet (or any other airline) the slot divestment would be required of Air Canada.
Or no one will show up and try. But that seems unlikely given the timeline and opportunities.
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