Air Canada’s Acquisition of Transat is a Forced Love Letter to Quebec

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.

Green = Shared, Red = Rouge only, Blue = Air Transat only
via Great Circle Mapper

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.

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20 Responses to Air Canada’s Acquisition of Transat is a Forced Love Letter to Quebec

  1. Jason H says:

    Could the combined operation be a bit more like KLM/AirFrance where the two airlines are owned by one company but operate mostly independently from their own countries, although for Canada it would be their own provinces (‘Quebec airlines’ and ‘Ontario Airlines’). They can still increase efficiency by coordinating schedules, connections, and of course fares, even if day-to-day operations are independent.

    • CF says:

      Jason H – That wouldn’t make much sense when they’re in the same country.
      AF/KL does it because they are in separate countries and have to. There’s no reason to do that within a single country.

  2. henry LAX says:

    and ? your point is ? this type of pandering happens in every merger to soothe the nerves, then 3 years later when everyone forgets, then the integration will truly take place.

    if AC wants to delineate lines more clearly they can make it such that sun destinations go to Rouge and secondary and tertiary VFR destinations in France and QB province go to Transat, maybe plus a few Caribbean islands to keep total flying time constant per union contract to shut those annoying spoiled little union brats up.

    • Andy says:

      I can’t think of any airline merger in the last decade where they claimed the brands would continue to operate independently.

      • enplaned says:

        Air France/KLM: “More than an alliance, less than a merger.”

        They were literally unable to point to a single position that was rationalized out of existence by the merger – and as far as the governments were concerned, that was a feature, not a bug.

  3. Kris Moen says:

    Keeping AC and TS separate is required for operational reasons in YYZ. If TS and Rouge were suddenly combined, the AC code would be across the entire terminal footprint at YYZ. This was tried and failed during the AC-CP merger of 2000-2003.

    Keeping AC and TS separate in all functions allows for the Canadian Transport Minister (Montreal area Member of Parliament Marc Garneau) to say that allowing the merger of AC and Group Transat saves jobs. The “saves jobs” line will be used to override competition tribunal concerns. In the Transport Canada Modernization Act, the competition authorities prepare a report to the Transport Minister and the Minister then approves or rejects the competition recommendations. Savings jobs is an allowable reason to cast aside competition concerns.

    Finally, there is a federal election October 21, 2019 and jobs, trade, and the economy are all central issues. The AC takeover of Group TS has political expediency overriding all normal concerns.

  4. CraigTPA says:

    Yeah, the maple-and-bacon smell of politics is all over this deal. Didn’t Air Canada get burned badly on the politically-driven CP takeover? You’d think they would have learned something from that.

    I’m not sure the competition authorities are going to sign of on this, especially with recent operational issues suggesting Sunwing may not be all that stable (although some of that could be attributed to being down 4 planes out of 18 because of the Max-8 issues.)

  5. Cranky, I think you might underestimate just how fraught the politics really are in Québec. Predominantly francophone Québecois rarely refer to Québec as a province, however technically it might be one, but as a _pays_, a country. They self-identify as Québecois, not at all as Canadians, and dislike French tourists (those from France) who don’t get the point. Francophones named the country Canada, designed its flag, and wrote its national anthem–music and lyrics (the latter being completely different from the eventual English-language ones), but they do not feel the federation serves their interests or gives them much mind. In the 1997 referendum Québec voters came within 1.4 percentage points of voting for independence; among francophones the split was 70% for it. The acuity has lessened because the sovereignist Parti Québecois damaged itself tremendously while in power, but the heart still yearns. That’s what this is about.

    • A says:

      Having spent much time north of the border and working up there for several years I have nothing but absolute respect for the pride and independence Quebecois have. They have a truly distinct culture, above and beyond just the spoken language. Politics aside, without Quebec, Canada would be several steps closer to being truly homogeneous with the US. Most (all) Canadians I know definitely don’t want to be mistaken as Americans so maybe they should be thankful Quebec is keeping Canada weird.

      • Yes, Mr. A, it is a beautiful culture and the people were sorely provoked into wishing for independence. Still, they are reasonable, unlike, for example, Brexiteers, and quite outward-looking.

    • Howdy says:

      For past 19 years I’ve had Pied-A-Terre within complex where Air Transat’s HQ is housed. One thing I know about Quebecois is their ancestors built beautiful city of Montreal at base of Mount Royal – welcomed many, only asking newcomers to respect their French language and culture.

      You’ll be amazed at HUGH numbers objecting to these request – which to me, doesn’t seem too much to ask!!

  6. kellysheard says:

    I think you pretty much nailed it…it is a business and Quebec political deal. And you are right too, there are (I hope) some serious hurdles to be done re: competition bureau and regulations.
    That said, truly sad move…Air Transat has greatly improved in recent years…new planes…civil staff…fly to places people want to go (not always frequently, but)…for a decent price. Partner and I just did a YYZ GLA flight and it was fine. It was not always so…!!
    So now Air Canada will “rationalize” “extract value” “introduce synergies”
    etc etc. You know the corporate drill. Arrgh…Canada needs more air carrier competition, not less.

  7. Kilmer says:

    Deja vue, all over again. Thirty years ago, Wardair went bust. Air Canada was sniffing around but Canadian Airlines bought them. The intent was to operate Wardair separately as a lower cost subsidiary. The Wardair pilots – spoiled brats, as usual – sued to get the same contract as Canadian mainline pilots, and won. At which point, Canadian gave up and never did operate a subsidiary. The Feds took the Wardair A310s and the RCAF is still flying them. So, Air Canada already operates Rouge. Can Rouge and Air Transat both survive? What would be the point? Unfortunately, politicians in Canada simply don’t understand the airline industry and pursue wishfull thinking. Then reality intrudes. Example: the Feds were desparate to have domestic competition and did everything to have Air Canada and Canadian compete. Which they did, cut each other’s throats and you end up with two dead ducks. To mix my metaphors. So AC took over CP. Then the Feds were desparate to avoid this monopoly gouging the consumer. But within a short time, AC went bust. If you are a gouging monopoly, how could you possibly go bankrupt? Next….

  8. Sean M. says:

    I live in Phoenix, and was flown specifically to Toronto for business, since the local sales reps knew if they brought in my (very) French Canadian coworker, they would lose a deal. The politics in Canada, as already stated here, are interesting.

    -Sean M.

  9. Eric says:

    Cultural and political issues aside; this scheme is viable as long as the global economy is ‘relatively’ stable. When there is an oil spike/geopolitical crisis/recession/alien invasion/magnetic pole flip/(insert crisis here) the cold financial facts usurp feel good branding.
    When it hits the fan and every C$ matters the AT brand will go away.

  10. Bad for Canadian aviation and worse for travellers. It will be interesting to see if the competition bureau steps in.

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