European Commission worries the proposal would reduce trans-Atlantic competition

The European Commission said Monday it wants to take a second look at the proposed merger between Air Canada and Air Transat to judge its impact on trans-Atlantic competition.

“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,” said Margrethe Vestager, the commission’s Executive Vice-President in charge of competition policy. “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 commission worries the merger would reduce or eliminate competition in 33 city pairs between Canada and Europe.

Air Canada and Transat signed a tentative merger deal more than a year ago in a half-billion dollar blockbuster.

But the proposal immediately drew the attention of competition regulators. A combined airline would control some 60% of the trans-Atlantic market from Canada. That share grows to two-thirds when Air Canada’s Star Alliance partners are included.

“Air Canada and Transat are the two leading airlines operating a wide network of routes between Europe and Canada,” said Vestager.

The European concerns mirror those expressed by Canada’s Competition Bureau, which found in March that the merger raised significant competition concerns on 83 routes from Canada, particularly to holiday markets, such as many European countries.

“The Proposed Transaction is likely to result in substantial competitive effects, such as increased prices, less choice, decrease in service, and a significant reduction in travel by Canadians for air passenger services and vacation packages through the elimination of rivalry between Air Canada and Transat in the areas of overlap between their networks,” said the Competition Bureau in late March.

The European Commission notes Air Canada developed its low-cost Rouge brand to compete head-to-head with Transat in the leisure market, a factor now working against the two companies.

“In particular, Air Canada, with its Air Canada Rouge brand, developed a business model to address the lower-cost and leisure-oriented nature of the EEA-Canada passenger air transport markets, thus directly competing with Transat,” the commission said. “Other airlines, in particular the [European Economic Area] national carriers, were found to be more distant competitors, only competing on a very small subset of routes out of their respective home hubs.”

Air Canada’s Rouge aircraft have been parked as a result of the COVID-19 pandemic.

The European Commission also said Westjet, which has been building a European network from its Calgary hub, would not likely pose a serious threat to a larger Air Canada, even in a non-COVID world.

“it is unlikely that WestJet would exert a sufficient competitive constraint on the merged entity with respect to the O&Ds that the Commission found problematic following its preliminary market investigation,” said the commission.

The review means the deal between Air Canada and Transat is not expected to close until the last quarter of 2020, if it’s allowed to proceed.

“To take into account the resulting longer delays, Transat has informed Air Canada of its decision to activate the first one-month extension of the outside date set for the transaction, provided for in the Arrangement Agreement,” Transat said in a release Monday. “It is therefore postponed for the time being to July 27, 2020, from June 27.”

The airlines are allowed three one-month extensions as part of their deal, with further extensions if certain conditions are met.

The commission announced its review the same day Nanos released a poll showing seven in 10 Canadians say increasing competition in the airline industry is an important or somewhat important contributor to the national interest. The poll was funded by ultra low-cost carrier Flair, which is not part of the merger talks.

Canada’s Transport Minister is currently studying whether a merger would be in the public interest.