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Report on Business Potential airline tie-up raises concerns of reduced competition, higher prices for travellers

An Air Transat plane, seen here on May 16, 2019, as an Air Canada plane lands at Pierre Elliott Trudeau International Airport in Montreal.

Ryan Remiorz/The Canadian Press

Transat A.T.’s decision to enter into exclusive talks to be taken over by Air Canada is raising worries that travellers will pay higher ticket prices if the rivals merge.

Air Canada faces a potentially steep climb convincing federal competition regulators that its planned $520-million purchase of Transat would be a desirable one, industry analysts say. But it might be the inevitable outcome if no competing offer emerges.

“It’s not good news with regards to the level of competition in the industry. Nevertheless, I think it’s the way for Transat to survive,” said Isabelle Dostaler, an aviation specialist and dean of business at Memorial University of Newfoundland. Still, she added: “I would be very surprised if this deal was stopped” by cabinet based on recommendations from the Competition Bureau and the Transport Minister.

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Montreal-based Transat, which sells vacation packages and operates airline Air Transat, has struggled to make money during the winter months as rivals stepped up competition. The situation has kept its share price down under $10 for much of the past five years, forcing the company to recast its strategy with a plan to develop hotels, which have higher margins than airlines.

Transat announced last month it had entered preliminary talks with multiple suitors that could lead to the sale of the company. It confirmed Thursday it is now starting more intensive negotiations on a final deal with Air Canada, saying joining with Canada’s dominant carrier is its “best prospect” for growing its business.

The possibility remained Thursday that a competing offer will emerge to trump Air Canada’s. Among the other suitors who have gone public is a group led by Quebec businessman Dominik Pigeon of FNC Capital, a Montreal financial-services company specializing in management-led buyouts.

Mr. Pigeon told The Globe and Mail his group is still weighing a bid.

“It’s the worst scenario if Air Canada acquires Transat,” he said. “It’s the biggest player who wants to become bigger in our local market, strangling competition."

Air Canada in exclusive talks to buy Transat in $520-million deal

Air Canada and Transat, Onex and WestJet: A guide to Canadian airline deals

Air Canada holds a roughly 43-per-cent share of the transatlantic air-travel market and Transat holds about 20 per cent for a combined share of 63 per cent, according to information contained in Transat’s latest earnings presentation. That dwarfs the number of seats offered by other players on routes to Europe, including Air France-KLM, Deutsche Lufthansa AG and WestJet. No other airline holds more than an 11-per-cent share.

For sun destinations, the market dominance of a combined Air Canada-Transat is less intense but still amounts to a roughly 46-per-cent share of total seat capacity, Transat estimates show. Sunwing Airlines Inc. and WestJet, the two other big players in the sun-holiday space, have shares of 27 per cent and 22 per cent respectively.

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In deciding whether to approve Air Canada’s proposed takeover of Transat, federal authorities would have to consider the bigger industry picture, said Robert Kokonis, president and managing partner of AirTrav, a Toronto-based aviation consultancy. And that means weighing the implications of private-equity firm Onex Corp. buying WestJet Airlines Ltd., a deal announced earlier this week.

That could be “a mitigating factor” as Air Canada makes its case and regulators weigh whether to impose any conditions, Mr. Kokonis said. “Before you go and weaken a merged Air Canada-Transat, you’d have to consider where the competition is going."

At least one consumer advocate opposes Air Canada taking over Transat.

“I am concerned that this is a move in the wrong direction, decreasing competition instead of increasing it,” said Gabor Lukacs, founder of the group Air Passenger Rights.

The issue of competition was examined in detail by Air Canada and Transat leading up to Thursday’s announcement, said Christophe Hennebelle, Transat’s corporate vice-president. “We think we’ve done our homework,” he said.

There is substantial overlap between Transat and Air Canada’s offerings, and the companies will likely propose some kind of remedy in order to obtain regulatory approval, Desjardins Securities analyst Benoit Poirier said in a research note. One possibility is redeploying planes on routes outside Europe, he said.

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total transatlantic seats

Summer 2018

5.1 million

Forecast

Summer 2019

5.5 million

transatlantic market share*

Forecast Summer 2019

Transat:

20%

Air Canada:

43%

Air France-KLM: 11%

Lufthansa: 6%

WestJet: 6%

British: 5%

Other:10%

*By seat capacity between Canada and 15 European countries

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: transat inc.

total transatlantic seats

Summer 2018

5.1 million

Forecast

Summer 2019

5.5 million

transatlantic market share*

Forecast Summer 2019

Transat:

20%

Air Canada:

43%

Air France-KLM: 11%

Lufthansa: 6%

WestJet: 6%

British: 5%

Other: 10%

*By seat capacity between Canada and 15 European countries

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: transat inc.

total transatlantic seats

Summer 2018

5.1 million

Forecast

Summer 2019

5.5 million

transatlantic market share*

Forecast Summer 2019

Transat:

20%

Air France-KLM:11%

Air Canada:

43%

Lufthansa: 6%

WestJet: 6%

British: 5%

Other: 10%

*By seat capacity between Canada and 15 European countries

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: transat inc.

Premier François Legault’s Coalition Avenir Québec government welcomed the potential tie-up, calling it a made-in-Quebec solution in a historically difficult and complex industry. The Premier is a former executive with Air Transat.

“You create a stronger company I think with this acquisition, which is good for Quebec,” Quebec Economy Minister Pierre Fitzgibbon told The Globe in an interview Thursday.

Mr. Fitzgibbon said he communicated his government’s “sensitivities” to Air Canada chief executive Calin Rovinescu about Transat’s employment levels and the impact on consumers. He said he was told the airline is open to maintaining Transat’s tour-operator management jobs and beefing up its own corporate structure in Montreal.

Quebec has said that it would prefer that Transat is not stripped down by any new owner, that its head office remains in Montreal and that it continue to grow as a corporate entity in the province. The government said it has mandated its investment arm to prepare support for a local buyer if needed.

Air service to Quebec’s outlying areas also remains an issue. Air Canada is the only carrier to serve several smaller destinations within the province, a situation that has forced ticket prices up.

“Right now, there is abuse because there is a monopoly on certain domestic routes,” Mr. Legault told reporters in Quebec City. He said he wants to make a deal with Air Canada capping ticket prices on regional routes while ensuring the carrier still makes a reasonable profit.

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