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An empty Air Canada check-in counter is seen at Montreal-Trudeau International Airport in Montreal, on Wednesday, April 8, 2020. The Air Canada-Transat deal is awaiting approval by the Canadian government and European regulators.

The Canadian Press

The COVID-19 pandemic that has plunged the airline industry into crisis has thrown into question Air Canada’s proposed $720-million takeover of rival Transat AT Inc.

Transat’s stock price has fallen to less than $10, well below the offer of $18 Transat shareholders approved in August, as markets and industry experts say there is a risk the deal falls apart.

The Air Canada-Transat deal is awaiting approval by the Canadian government and European regulators. Transport Canada is due to submit its public-interest assessment of the takeover to Marc Garneau, the Minister of Transport, on May 2. The Competition Bureau in March submitted its report on the deal, concluding it was bad for consumers and would reduce competition and raise air fares. The decision rests with the federal cabinet, based on Mr. Garneau’s recommendation.

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John Gradek, a lecturer on aviation at McGill University, predicted the deal will win Canadian government approval, but that Air Canada will walk away or try to negotiate a lower price at a time the world’s airlines have parked 16,000 planes and ceased most service.

“Does Air Canada still want the deal? That’s the question,” Mr. Gradek said. “At the price that they paid for it and given the current value of air transport stocks it would be the financially prudent thing for Air Canada to say, ‘pass.’ "

They overpaid for Transat, he said, given what the industry is going to look like in the future. “Air Canada’s got 225 airplanes parked. Does it need 33 more airplanes? The answer is no.”

On Tuesday, Air Canada was asked whether it would end or renegotiate the deal. “For now, our priority is looking after our employees and our customers as well as implementing cost-saving steps to conserve cash during the crisis," Peter Fitzpatrick, a spokesman for the airline, told The Globe and Mail.

Jean-Marc Eustache, Transat’s chief executive, said on March 12 the takeover will proceed without any changes. Speaking one day after the World Health Organization declared the COVID-19 outbreak a pandemic, he said Air Canada had no legal basis to alter the terms of the agreement. A Transat spokesman said this week there are no changes to the agreement.

Air Canada raised its offer to $18 from $13 last summer to placate unhappy Transat shareholders and to get ahead of other interested parties. Air Canada was keen to bolster its fleet with Transat’s new Airbus models at a time that its Boeing 737 Max planes are grounded because of safety problems. The deal would also remove a competitor on transatlantic routes and boost market share, allowing Air Canada to tap Transat’s $680-million in cash and keep pace with Calgary rival WestJet Airlines Ltd., which had just announced a deal to be taken private by deep-pocketed private equity investor Onex Corp.

The agreement allows either side to terminate the deal, under certain conditions, by paying a $40-million fee. Both sides initially said the deal would be completed in early 2020. According to a copy of the agreement, either side can walk away if the deal is not finalized or extended by June 27, provided some conditions are met.

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Jacques Roy, a professor at HEC Montreal, the University of Montreal’s graduate business school, said once the global economy and travel markets recover, the deal’s benefits will persist, albeit at a lower value. “My gut feeling is that, of course, they may not be willing to pay that much for Transat at this time but ... all of the good reasons they wanted to acquire Transat last year are still valid once we go through this difficult period," Mr. Roy said.

The Competition Bureau spent several months studying the impact of the Air Canada-Transat deal and concluded in late March it was bad for consumers, leading to fewer choices and higher ticket prices. The two companies’ services overlap on 83 routes, including 49 between Canada and Europe and 34 between Canada and vacation spots in Florida, Mexico, Central America and the Caribbean, the watchdog said.

However, the Competition Bureau conducted its probe before the deadly virus halted most air travel and threatened the survival of many of the world’s airlines. When it submitted its report, the bureau said the pandemic’s impact on the airlines could change its conclusions, but it is too soon to say.

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