Breaking news out of Canada as Air Transat and Air Canada agree to terminate their merger. After announcing the merger in 2019 and securing an agreement after some bumps, the ongoing crisis and hold-ups with the European Commission (EC) have led the two airlines to cut the merger agreement, with Air Canada paying out a termination fee to Air Transat.

European Commission would not approve the merger

The two airlines are materially concerned about not receiving merger approval from the EC. To receive approval from Europe, Air Canada and Air Transat would have to agree to more remedies, which still would not guarantee European approval.

Air Canada stated the following:

"As previously disclosed, the acquisition was conditional on the approval of various regulatory authorities, including the European Commission ("EC"). In order to meet that key condition, Air Canada offered and enhanced a significant package of remedies, which went beyond the commercially reasonable efforts required of Air Canada under the Arrangement Agreement and what has been traditionally accepted by the EC in previous airline merger cases. Following recent discussions with the EC, it has become evident, however, that the EC will not approve the acquisition based on the currently offered remedy package."

Air Canada believes that providing additional remedies to receive European approval would "significantly compromise Air Canada's ability to compete internationally."

The European Commission on the deal

The EU has had some concerns about the proposed merger, which would further consolidate competition and routes between Canada and Europe. The EC was mostly concerned that the merger would lead to higher fares and fewer travel choices between Europe and Canada.

The EU highlighted in 2020 concerns about the following:

"The Commission is concerned that the proposed transaction could significantly reduce competition on 33 origin and destination (O&D) citypairs between the EEA and Canada. These include 29 O&Ds where both companies offer direct services and four where one company flies direct and the other one indirect via one of its hubs."

The EC also looked at WestJet as a potential competitor in the market. Even if WestJet expanded its transatlantic operations, which was not a given, the EC believed Air Canada would have a massive hold in the market.

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Air Canada pays out a termination fee

Air Canada paid out a C$12.5 million termination fee with Air Transat after ending the agreement. It is a one-time fee. In the grand scheme of the airline industry, this fee is not very burdensome for Air Canada, but the airline believes that paying off this one-time fee is worth it if the carrier is not bound to onerous conditions that would make the Air Transat merger unviable.

Air Canada's transatlantic routes are lucrative. The airline also does well in the market even before the question of an Air Transat merger. Without Air Transat, Air Canada is focused on rebuilding its network and "creating the optimal conditions for its full recovery."

Without the merger, Air Transat is now on its own. The carrier already was looking at a backup plan after the merger, and those plans are expected to be intensified as the carrier looks at what happens now. With strong border restrictions in place and a largely international route network, Air Transat is eagerly awaiting border reopenings and a chance to fly its full network.

What do you make about Air Transat and Air Canada ending their merger agreement? Let us know in the comments!