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TRANSPORTATION REPORTER

Sunwing Travel Group is solidifying its position as Canada's second-largest tour operator by merging with Signature Vacations, putting pressure on leader Transat A.T. Inc. as the industry struggles with an excess of holiday packages.

Analysts have been concerned about the ability of Transat and Sunwing to maintain profit margins amid intense competition, pointing to the "economic slack" in the industry - tens of thousands of unsold holiday packages during the economic downturn, despite sharply discounted prices.

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But Stephen Hunter, Sunwing's chief operating officer, said he's starting to see rosier advance bookings - signs of an uptick in consumer confidence as tour operators prepare for the fall and winter travel season to sun destinations.

"Every week that goes by, we're seeing year-over-year improvements, and of course, cold Canadian weather wouldn't hurt, either," Mr. Hunter said in an interview yesterday after announcing Sunwing's merger with the Canadian operations of TUI Travel PLC.

British-based TUI, through its money-losing First Choice Canada division, owns tour operator Signature and the SellOffVacations retail arm.

"The consumer will benefit with better pricing and improved product lines in the next six to 12 months," he said. "People don't want to stay at a dump. They want a nice hotel, but they don't want to pay a lot. There will be deals."

Sunwing, privately owned by the Hunter family of Toronto, is effectively selling a 49-per-cent equity stake in the combined entity to TUI, but will relinquish only a 25-per-cent voting interest.

Under the transaction set to close by mid-November, TUI is offering Signature, SellOffVacations and $101-million in return for the equity stake. Mr. Hunter, 38, will become president and chief executive officer of Sunwing, replacing his father, Colin, who remains as chairman. The Sunwing, Signature and SellOffVacations brand names will be retained.

Toronto-based Sunwing runs a packaged holiday unit and also operates a fleet of 14 leased Boeing 737-800 jets through its airline division. Sunwing is pledging to honour its contract to charter Skyservice Airlines Inc. to fly on behalf of Signature, but could switch to Sunwing's fleet within two years. Skyservice also flies on behalf of Sunquest Vacations, the country's third-largest tour operator.

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Federal rules limit foreign ownership of Canadian airlines to a 25-per-cent voting interest, although Ottawa plans to raise the cap to 49 per cent.

Montreal-based Transat posted a $43.7-million profit for the nine months ended July 31, but it is warning about the "abundant supply" of holiday packages on the market. Sunwing said its annual revenue surpasses $660-million and its earnings before interest, taxes, depreciation and amortization in the current fiscal year should exceed the $42-million posted for the year ended Oct. 31, 2008. By contrast, TUI's Canadian operations are forecast to lose $38-million for its current fiscal year.

The combined Sunwing entity will have revenue of $900-million a year.

"The Canadian tour operator market has been plagued in recent years by too much capacity and too many players," Versant Partners Inc. analyst Cameron Doerksen said in a research note yesterday. "As a result, margins for all operators, Transat included, have been squeezed."

In April, Conquest Vacations Inc. shut down after 37 years in business, blaming slow sales and cutthroat pricing in the industry.

Signature has strength in Mexico, complementing Sunwing's clout in Cuba, Mr. Doerksen said. The Sunwing-Signature team plans to crank up its promotion of Mexico, whose tourism industry got crushed last April after the outbreak of H1N1 influenza.

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Other leading players in the sector include Air Canada Vacations and WestJet Vacations. Gregg Saretsky, formerly at Alaska Airlines Inc., was named vice-president for WestJet Vacations in June, signalling parent WestJet Airlines Ltd.'s plans to expand its tour division.

Transat A.T. (TRZ.B)

Close: $14.59, up $1.09

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At a glance

SUNWING

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Owns tour operator Sunwing Vacations and charter carrier Sunwing Airlines.

TUI TRAVEL

Owns tour operator Signature Vacations and retail division SellOffVacations.

MARKET SHARE

Sunwing currently has an estimated 18 per cent of market share and Signature has 12 per cent. Combined, the merged entity will have a 30-per-cent share, second only to Montreal-based Transat A.T. Inc. at more than 40 per cent.

EMPLOYEES

Fast-growing Sunwing has 900 workers while TUI's First Choice Canada division, with Signature and SellOffVacations, has 350 staff.

Sources: Sunwing, TUI, tour industry reports

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