Why Did Air Canada & Air Transat Need European Approval To Merge?

Just before the weekend hit, it was revealed that the highly-anticipated merger between Air Canada and Air Transat would be terminated. Hurdles with European officials had a significant impact on the decision. Therefore, with the deal off the table, let’s take a look at what the authorities had to say.

Air Canada Boeing 787 Dreamliner
With the airlines operating heavily in European airports, officials were concerned about the competition on the routes. Photo: Vincenzo Pace | Simple Flying

A strong presence in the union

The European Commission (EC) previously shared that it had been concerned that the proposed transaction could significantly reduce competition on 33 origin and destination (O&D) “citypairs” between the European Economic Area (EEA) and Canada. These include 29 O&Ds where both firms offer direct services and four where one carrier flies direct and the other one indirect through one of its hubs.

The EC’s preliminary market investigation showed that Air Canada and Air Transat have been historically competing against each other for passenger services between the EEA and the carrier’s home nation. Notably, Air Canada, through its Air Canada Rouge brand, grew a business model to handle low-cost and leisure EEA-Canada passenger segments. Therefore, it ended up directly competing with Transat. Other operators, in particular the EEA-based carriers, were found to be more distant competitors, only competing on a handful of routes out of their respective operating hubs.

The Commission also felt that even if WestJet expanded its transatlantic operations to Europe, it would unlikely have enough presence to rival the merger with respect to the O&Ds that the authorities found were an issue.

Canadian aviation is going through significant challenges due to the lack of support amid the ongoing travel restrictions. Photo: Getty Images

An investigation was required

EC Executive Vice-President Margrethe Vestager, responsible for competition policy, shared the following in a statement last year:

Air Canada and Transat are the two leading airlines operating a wide network of routes between Europe and Canada. We will carefully assess whether the proposed transaction would negatively affect competition in these markets leading to higher prices, reduced quality or less choice for travellers flying over the Atlantic. This is a challenging time, especially in markets severely impacted by the coronavirus outbreak, but a return to normal and healthy market conditions must be based on markets that remain competitive.”

The EC then went on to carry out an in-depth investigation into the effects of the proposed transaction to conclude whether it is likely to considerably cut competition to and from Europe.

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So, nearly a year later, Air Canada came back with its dreaded news. The deal with its counterpart wouldn’t go ahead. Vestager also shared findings from the investigation, which she said was assessed on facts and merits.

Air Transat Airbus A330
Transat has been in need of a new lease of life. Photo: Getty Images

The verdict

The commission looked at the extent to which the global health crisis would impact Air Canada, Transat, and their rivals’ operations. The conclusion was that based on the information available, in the long run, the two Canadian carriers would “likely remain actual or potential competitors” on the majority of the routes between the EEA and Canada, which they both served on before the pandemic.

In a statement, Vestager shared:

“Air Canada and Transat are the two leading airlines with a wide network of routes between Europe and Canada. We opened an in-depth investigation because we had concerns that the proposed transaction would negatively affect competition in these markets leading to higher prices, reduced quality or less choice for travellers…Based on the in-depth analysis carried out during the Phase II investigation, the Commission’s preliminary findings were that the proposed transaction would raise competition concerns on a large number of transatlantic routes. Based on the results of the market test, the remedies offered appeared insufficient.”

This is not the first time that the Commission has been wary of such an aviation transaction. It announced that it launched an investigation into the Boeing and Embraer joint venture at the end of 2019. The two manufactures would also scrap the deal the following year. Altogether, the EC wasn’t budging on its view, despite Air Canada’s attempts. Amid the challenging conditions of the health crisis, the group would undoubtedly be extra careful approving such transactions.

What are your thoughts about the European Commission’s power over such mergers? Would you have liked to see the merger go through? Let us know what you think of the situation in the comment section.