The companies announced late Friday that they no longer intend to combine, citing regulatory challenges for the decision.
After careful consideration, Air Canada has concluded that providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada’s ability to compete internationally, negatively impacting customers, other stakeholders and future prospects as it recovers and rebuilds from the impact of the COVID-19 pandemic.– Air Canada statement
Air Canada will pay C$12.5 million to Transat to terminate the deal.
Competition concerns galore
In many ways the various regulators perhaps were competing over which would present the competition challenge that ultimately would sink the deal. Canadian regulators initially took a relatively hard line on the deal. Ultimately they relented, however, in large part owing to the shutdown of Canada’s international air traffic market amid the COVID-19 pandemic. In announcing a conditional approval mid-February Canadian regulators focused on the likelihood that Transat might not be able to survive on its own in the current climate:
[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.
But while Canadian regulators were sated, especially by guarantees for local jobs in Quebec, the Europeans proved harder to convince.
European regulators would have focused squarely on the many overlapping routes and reduced competition. Unlike their Canadian counterparts the guarantee of access to slots to operate as a new entrant proved insufficient.
Air Canada did not offer specific details of what else the EC sought. But the company shared that “a significant package of remedies, which went beyond the commercially reasonable efforts required of Air Canada under the Arrangement Agreement and what has been traditionally accepted by the EC in previous airline merger cases,” was insufficient to assuage those concerns.
As a result Air Canada “concluded that providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada’s ability to compete internationally, negatively impacting customers, other stakeholders and future prospects as it recovers and rebuilds from the impact of the COVID-19 pandemic.” The deal is dead.
This is not the only Canadian airline deal squashed by regulators recently. Delta Air Lines and Westjet walked away from their planned joint venture rather than cede eight slot pairs at LaGuardia to appease the US Department of Transportation.
Can Transat survive standalone?
The timing of this move puts Transat in a difficult position. The company must pay off a revolving credit debt of C$50 million by the end of the month and another C$250 million at the end of June. And, unlike in the USA, the Canadian government did not pump billions into the industry during the pandemic.
Quebecois businessman Pierre Karl Péladeau offered C$5/share for the company. The initial Air Canada offer was C$13/share before it dropped during the pandemic to C$5. That’s not enough cash to cover the open debt calls over then next eight weeks and questions remain as to whether Péladeau has the financing in place to close the deal that quickly anyways.
Moreover, the carrier focuses on international leisure travel. Most expect the leisure market to rebound faster than business, but the peak Summer season for European trips appears at risk for Canadians.
The country implemented relatively strict quarantine rules. Gateway airports are limited. Those requirements could be relaxed, but a timeline – or confirmed standards – for loosening the restrictions remains unclear.
Moreover, vaccination rollout is relatively slow going thus far. Fewer than 15% of Canadian have received their first shot as of 4 April.
Given limited government support for the industry and an uncertain short term future it is reasonable to question the company’s future.
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