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Onex’s $3.5-billion deal to buy Air Canada rival WestJet Airlines is not risk free.J.P. Moczulski/The Canadian Press

The last time Gerry Schwartz sought to become a top gun in Canada’s airline industry, the country’s two main carriers were the opposite of high flyers. Air Canada and Canadian Airlines, which Mr. Schwartz’s Onex Corp. unsuccessfully tried to buy and merge in 1999, were both teetering on the brink.

The domestic airline industry is in a much better place today. But that doesn’t mean Onex’s $3.5-billion deal to buy Air Canada rival WestJet Airlines is risk free. The Calgary-based carrier has increasingly moved into Air Canada’s airspace, seeking to lure business travellers and other premium-paying passengers away from its Montreal-based rival.

That can only mean one thing: a bruising battle to come.

Canadian Airlines was ultimately absorbed by Air Canada because the Canadian market was too small to sustain two national carriers. The structure of the airline industry has changed dramatically in the past two decades. But enough to support a renewed Canadian duopoly?

Onex appears to think so. But WestJet has only begun to test that hypothesis.

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As long as it stuck to its Western Canada, low-cost niche, WestJet did not threaten Air Canada on its core domestic and international routes. With Onex on board, and liberated from the tyranny of the stock market, WestJet would be better positioned to take on Air Canada. That would be especially true if WestJet, with Onex’s backing, were to buy Air Transat, an Air Canada rival on European routes in summer and Caribbean ones in winter.

It would not be the first time Mr. Schwartz and Air Canada chief executive officer Calin Rovinescu have been on opposite sides of an airline battle. When Mr. Schwartz launched his 1999 bid, Mr. Rovinescu was the Stikeman Elliott lawyer brought in by Air Canada to thwart Onex. He crafted the legal strategy that stopped Mr. Schwartz in his tracks after a Quebec Court ruled that Onex’s bid violated a 10-per-cent ownership limit on Air Canada’s shares.

Mr. Schwartz had appeared so confident of victory that Onex’s internal code name for its takeover strategy was Project Peacock. He ended up retreating with his tail between his legs.

It was a rare setback for Mr. Schwartz, and one he did not see coming. After all, Mr. Schwartz appeared to have won support for his bid from then-prime minister Jean Chrétien’s Liberal government. Mr. Schwartz’s deep Liberal ties may have helped, but Onex was also seen to be doing Ottawa a favour as both airlines struggled to survive on their own.

“Because it is a large, important Canadian enterprise in an industry that is broken,” Mr. Schwartz replied in 1999 when asked why he launched his bid for Air Canada. “There's a real opportunity here to transform the industry by bringing these two companies together.”

Air Canada and Canadian did end up merging, just not under Onex’s ownership. But Air Canada still ended up seeking court protection from its creditors in 2003. Mr. Rovinescu, who was Air Canada’s chief restructuring officer during that period, left the following year to become a co-founder of Genuity Capital Markets. In 2009, he returned to Air Canada as CEO.

Now, after turning Air Canada into a star performer, Mr. Rovinescu once again faces a threat from Mr. Schwartz. Asked on Monday about the Onex-WestJet deal, Mr. Rovinescu told Reuters: “It’s business as usual.” But, Onex’s entry onto the scene has to be unsettling.

The overall trend in the North American industry is one of shrinking margins as airlines add capacity at rates exceeding economic growth. Fuel and labour costs are rising again. With a global economic slowdown looming – the current expansion is, after all, exceedingly long in the tooth – the airline industry could be only a recession away from another reckoning.

In a 20-year forecast, released last month, the International Air Transport Association noted that the frequency of air travel has flattened in North America and Europe. “Air travel markets are reaching maturity in most developed economies,” IATA said. “The rise in the frequency of air travel of the average citizen – which underlies the expected growth in air passenger demand over the next 20 years – will occur mainly in the world’s emerging markets.”

Onex’s bet on WestJet appears to fly in the face of that trend. But Mr. Schwartz has waited 20 years to buy a Canadian airline. And Mr. Rovinescu may not be able to stop him this time.

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