It’s been a month since Air Canada and Transat announced they were in exclusive merger negotiations. Now the deal has officially been announced. Air Canada will pay C$13 a share — about C$520 million — to buy Transat. Approval from shareholders and the government is far from guaranteed, but that might not be a bad thing. The way this has come together is pretty odd, and I’m guessing that’s all because of the French Canadians.
For those not familiar, Transat is a massive Canadian leisure travel company that owns Air Transat. Air Transat has 38 airplanes that alternate between flying to warm weather locales (more in the winter) and tourist spots in Europe (more in the summer). Twenty-seven of those are widebodies, though 7 of those are ancient A310s which are being replaced as A321LRs get delivered. The airline is expecting growth over the next few years. Does this sound similar to Air Canada Rouge? It should. Here’s a look at the non-Canadian destinations for both.
You can see a whole bunch of overlap here. Rouge has more spots in the US, South America, and Europe because in those places it is acting less as a pure leisure airline and more as a lower-cost operator serving destinations Air Canada wants to serve. Many of the blue Transat destinations you see on the map are also served by Air Canada mainline, like London, Paris, New Orleans, etc. So there’s even more overlap than you see here between the two companies.
Transat has been trying to sell itself, and Air Canada quickly came knocking for obvious reasons. The idea seemed to be that Air Canada could kill a competitor, reduce capacity, put Transat under the Air Canada Vacations brand (or the other way around), and then fold Air Transat into Air Canada’s Rouge leisure airline. But that doesn’t appear to be the plan.
Instead, Air Canada has indicated it will keep the Transat and Air Transat brands separate. Not only will the brands be separate, but Air Canada will “maintain the Transat head office and its key functions.” So this isn’t much of a merger but simply an acquisition at arm’s length, it seems. Why on earth would they do that?
My initial thought regarding Air Transat specifically is that this would run afoul of union agreements to limit the size of Rouge. But I think that issue has been resolved. I see Rouge is already planning to increase its narrowbody fleet from 28 to 39 by 2021, so there is room for growth. But even if that is an issue, why would they keep the Transat (not the airline) brand name separate instead of merging that with Air Canada Vacations? That seems like a missed opportunity. My best guess… it’s all politics.
Look no further than the Air Canada press release to see some serious fluffing of Montreal and Quebec. Some quotes…
- Transat head office and key functions to be preserved in Montreal; made-in-Quebec combination to provide compelling platform for future growth and employment.
- “The Quebec economy will derive maximum advantage of having a Montreal-based, growth-oriented global champion in aviation, the world’s most international business,” said Calin Rovinescu, President and Chief Executive Officer at Air Canada.
- “This fully-funded cash transaction is the ideal platform for Transat’s presence and jobs in Montreal, and therefore represents the best option for all our stakeholders: employees, suppliers, partners and shareholders,” said Jean-Marc Eustache, President and Chief Executive Officer of Transat.
- Headquartered in Montreal since 1949, Air Canada maintains one of the largest global head offices in Quebec and has been named one of Montreal’s top employers in each of the last six years. Air Canada employs 36,000 employees globally, with approximately 10,000 in the province of Quebec where it has created over 2,600 new jobs over the last five years. Air Canada’s President and Chief Executive Officer and other Executive Committee members are all based at the Montreal Headquarters.
There’s more, but you get the point. Yes, Air Canada is based in Montreal, as you can see from the bullet points, but it also has a large corporate presence in Toronto. Toronto is also hugely important to the network, and I imagine the Montreal folks have somewhat of a Napoleon complex, to keep the French theme going. There is quite the division between the French Canadians of Quebec and pretty much everyone else in Canada. Just look at how much money the government there has poured into Bombardier to see just how important it feels it is to keep companies local in Quebec.
This quote from the founder of Transat (as printed in a CBC article) — who is now the Quebec Premier — shows exactly what I mean.
I think it’s the less worse scenario. I think that the airline business is quite controlled with not many players in Canada, you have Sunwing, WestJet, Air Canada and Transat. So, I think it was one of the three that would buy Transat and I prefer Air Canada because the headquarters are in Montreal.
It’s more about keeping Transat in Quebec than it is about finding the best partner. And that may very well cause problems when it comes to getting this approved by multiple parties. First, shareholders will have to approve. There were other offers in discussion that would have paid more than Air Canada, but at least one did depend on funding from Quebec. Others had obliquely talked about it being worth even more than that, and that may make it tough for some shareholders to approval this deal as is. Then the government will have to approve on anti-competitive grounds, and, well, you’ve seen the overlap. This isn’t a slam dunk by any stretch.
Let’s say Air Canada succeeds. Then what? It’s hard to imagine it really running these businesses separately considering how much synergy there would be to combine them. Then again, if that’s the price required to get the Quebecois to give it the thumbs up, then Air Canada may believe it’s better off at least controlling the company, even if it can’t realize all the benefits. It can still shrink it and put the airline on routes that don’t compete with Rouge or mainline. So there is value. It’s just not as much value as Air Canada might like.