Air Canada

Analysis: Air Canada – Transat deal collapsed. What’s next?

Transat executives turn their attention to survival after blockbuster deal dies

Transat deal collapsed
Transat has returned a half-dozen aircraft to leasing companies during the pandemic, including this Airbus A321 (Brett Ballah).

It was not a very Good Friday for Transat executives. Their airline is grounded, the blockbuster Transat merger with Air Canada has collapsed. Where do they go from here?

First, a bit of background. Air Canada proposed buying all of Transat’s shares in a cash and shares deal. It would have maintained the Transat brand, and kept the company’s head office in Montreal. Canadian regulators gave their blessing in February. But a key sticking point has always been trans-Atlantic competition. A merged airline, along with Star Alliance partners, would have controlled two-thirds of the market. That was too much for European regulators. Air Canada offered measures to reduce market concentration, but by Friday, it became evident the offers weren’t enough.

“Now that Transat is no longer contrained [by its agreement with Air Canada],” said Transat chief executive Jean-Marc Eustache in a statement, “we are free to take the necessary steps to ensure a successful, long-term future.”

But none of those steps is easy, or guaranteed.

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Step 1 – secure new financing

Any business needs money to survive.

“The Corporation will need to address the challenges posed by its cash position and the maturing lending facilities,” said Transat. “If the Corporation is not able to renew maturing facilities at acceptable conditions or find financing alternatives, its financial position and business prospects could be materially and adversely affected.”

Cash flow is not strong at Transat right now. After the federal government tightened measures against international travel in late January, Transat grounded its fleet. Again. Just as it had early in the pandemic. New testing and quarantine measures were designed to stop Canadians from flying to sun destinations. That, of course, is the niche where Transat specializes in the winter. No flights means no money coming in.

Transat needs to secure about $500 million to survive the year. And time is of the essence. First, a deadline looms April 29 on conditions on a short-term loan. “After which time, absent of any extension, the Corporation could be in default of its obligations and the term of its borrowings could be accelerated.” Translation: if they miss that deadline, the lender may ask for repayment..

After that, a $250 million interim loan expires June 30. So the company is negotiating for a loan under the federal Large Employer Emergency Financing Facility – and hoping for a government lifeline.

LEEFF terms are generally not as good as you can find on the open market. But the money will keep you alive. Transat would be the second airline to tap the federal fund. Sunwing announced in February it was taking a $375 million loan. As part of the deal, Sunwing agreed to keep some of the money in an account to refund passengers whose flights were cancelled due to the pandemic. No doubt Transat would face similar conditions.

Step 2 – get back in the air

With funding secure, Air Transat can get its planes back in the air. Maybe.

As a specialist in international flights, ongoing quarantine measures and border closures are having an outsized impact on Transat. It its last quarterly report to shareholders, Transat reported a loss of $109 million, with only $41 million in revenues. That’s when the airline was operating a reduced schedule of holiday flights.

Transat needs to get its aircraft back in the air and earning money. But again, factors outside the airline’s control will help determine its destiny. While carriers such as Flair and Swoop plan expanded domestic services this summer, that option is not available to Transat. So it is dependent on the federal government allowing international travel to flourish again.

“The Corporation has assumed, among other things, that travel and border restrictions imposed by government authorities will be relaxed to allow for a resumption of operations of the type and scale expected,” the company said. On top of that, the company’s future depends on a number of other assumptions:

  • government and airport health measures will be consistent with plans already in place,
  • travellers will continue to travel despite the new health measures,
  • business partners will continue to offer credit as they have in the past, and
  • management will continue to manage cash flow to fund capital requirements.

“If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements,” the news release warns.

Step 3 – find a new suitor

“We have heard signals from Quebec that Transat will not be let the down,” Eustache told analysts on March 11.

The deal with Air Canada imposed strict conditions on Transat. That includes a major payment if someone else bought Transat within a year of the deal’s failure. Air Canada has now waived the condition. That leaves Transat free to talk with anyone.

“Transat is free to hold discussions with potential strategic and financial acquirers, including Mr. Pierre Karl Péladeau,” said Transat. The former leader of the Parti Québécois tried repeatedly to disrupt the Air Canada merger. He offered to buy Transat for $5 a share, an offer he reiterated Friday.

“Mr. Péladeau’s offer contains a rigorous business plan emphasizing sectors where the company has a large growth potential,” he said in a statement. “[His offer] assures, by maintaining an independent Air Transat, a competitive market that will benefit Quebec and Canadian consumers.”

Transat directors promise to examine the offer.

“The most important thing for our government is to protect jobs in Quebec and across Canada, as well as preserving the long-term viability of Transat A.T.,” said federal Transport Minister Omar Alghabra in a statement.

Or go it alone

Finally, Transat executives have made no bones about it; they believe in their business plan.

It centres on having just two types of aircraft, Airbus A330s for busy routes, and the long-range Airbus A321neo for thinner routes. The 321 has proved a formidable aircraft – enough range to get across the Atlantic, but small enough to fly planeloads of Canadians to sun destinations.

As air travel recovers post-pandemic, where passenger numbers will be low, at least initially, the A321 may prove tough to beat.

“Transat’s smaller aircraft fleet provides greater flexibility and efficiency,” the company said.

On top of that, most experts agree Transat’s niche – visiting friends and relatives – will recover more quickly than business travel.

“As a smaller operator,” the company said, “Transat can be nimble and quickly adapt to ever-shifting market conditions. There is significant pent-up demand among customers in the Corporation’s primary segments.”

All of these steps require Transat to survive in the near term.

“The global air transportation and tourism industry has been among those most affected by the COVID-19 crisis,” said Eustache. “However, the arrival of vaccines brings us a light at the end of the tunnel, and Transat is well positioned to bounce back. In close to 40 years of existence, we have traversed numerous crises and each time, we emerged stronger than before, demonstrating our resilience as an organization. We look forward to a safe and healthy future, as we hopefully put this pandemic behind us.”

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