Air Canada chief executive officer Calin Rovinescu was coy earlier this month when an analyst asked him, during a conference call to discuss the airline’s first-quarter earnings, whether the Montreal-based carrier was considering making another acquisition soon.
Speculation was rife by then that Mr. Rovinescu had his eyes on Transat A.T. Inc., the parent of Air Transat, which just days earlier had revealed that it was in preliminary talks with several suitors. And analysts figured the hyper-competitive Air Canada chief would not allow Air Transat to be scooped up by another industry player, especially not Calgary-based WestJet Airlines Ltd.
“So, we’re not commenting on any of the media speculation around [potential acquisitions],” Mr. Rovinescu told analysts on May 6. “And suffice it to say that we’re going to continue [with] the exploitation of our business plan that has brought us this far.”
Just 10 days later, Air Canada announced that had entered exclusive talks to buy Transat for $520-million, all but confirming that Mr. Rovinescu’s “business plan” had always included eliminating its pesky low-cost rival. After all, the creation of Air Canada’s own discount airline Rouge in 2013 was driven mainly by its desire to undermine Air Transat’s business strategy.
Air Canada squeezed dozens more passengers onto the aging Boeing 767 widebody jets it transferred from the mainline carrier to Rouge, enabling the low-cost division to go after Air Transat’s price-conscious consumers on European routes in summer and southern ones in winter. Rouge can fit 282 passengers onto its 767-300ERs, of which it operates 25; Air Canada’s mainline carrier has seats for only 211 passengers on its six remaining 767-300ERs.
No wonder that, by 2015, Mr. Rovinescu was calling Rouge “a fantastic tool for us.” And in the years since, other Air Canada executives continued to refer to Rouge as a “tool” it uses to hammer the competition. Transat’s financial decline has closely tracked Rouge’s expansion.
“Rouge truly has been an amazing tool,” chief commercial officer Lucie Guillemette said at the carrier’s annual investors’ day in February. “It competes much more effectively in leisure-focused sun markets than our mainline product and we have increased both frequency and capacity into these markets, thanks to Rouge. We are then able to shift capacity from these southern destinations into leisure-focused European markets during the summer months.”
But the days of snagging a cheap(er) flight to Spain or Mexico could be numbered.
If Air Canada strikes a final deal to buy Transat, and subsequently wins the approval of competition authorities and the federal government, it will dominate the market for transatlantic and Caribbean flights, with more than 60 per cent of the capacity currently available on such routes.
Post-takeover, analysts expect Air Canada would reduce capacity on these routes, in order to push up fares and enhance its margins. While competition on key Toronto-London and Montreal-Paris routes should remain robust, the number of flights to less popular destinations served by Air Transat (such as Marseille, Bordeaux, Lyon, Toulouse and Nice in France; Madrid and Barcelona in Spain; Lisbon and Porto in Portugal) could be cut back or eliminated entirely if Air Canada retires its 767s and shifts Air Transat’s younger Airbuses to other routes.
While the Competition Bureau might express concerns, it would a shock if it were to block an Air Canada takeover of Transat. Policymakers, including elected ones, tend to refrain from doing anything that might weaken Canada’s flag carrier. After all, it wasn’t that long ago that Air Canada’s own survival was threatened; no one in Ottawa wants to relive that saga.
That’s why Air Canada usually gets its way with federal lawmakers. In 2009, and again in 2013, the then Conservative government in Ottawa granted Air Canada pension funding relief despite a massive hole in its pension plan that has since been filled. In 2016, the current Liberal government loosened legal requirements placed on Air Canada when it was privatized in 1988 that forced the airline to maintain heavy-maintenance operations in Quebec.
The number of mainline air carriers has shrunk dramatically in the past decade as policy-makers in the United States and Europe seek to shore up a “broken industry” by approving multiple mergers. While the number of low-cost upstarts has also risen, many have been unable to survive the entry of mainline carriers into the low-cost market with the creation of their own discount airlines. The end result ends up being less competition in many markets, not more.
Air Canada’s takeover of Air Transat follows the same logic. Five years after the creation of Rouge, Mr. Rovinescu’s grand plan is close to fruition.