Air Canada’s proposed $520-million takeover of Transat – endorsed by Transat’s board of directors last week – promises turbulence for Canadian travellers.
The combination of the country’s No. 1 airline and its No. 3 carrier slashes choices for fliers in several areas. Air Canada-Transat will control about two-thirds of flights to Europe from Canada, about half of a number of routes to the Caribbean and more than half of the gate slots at Montreal’s Pierre Elliott Trudeau International Airport.
Air Canada says it plans to maintain Transat as a standalone brand. It also says the merged company will be good for travellers by offering more destinations and more flights. But Canadians can be forgiven for worrying about the prospect of a takeoff in fares, given such a significant reduction in competition as one of the country’s important airlines vanishes as an independent entity.
The Competition Bureau – and the federal government – have to approach this proposed deal with deep skepticism. Ottawa already knows what Canadian travellers see every day: It is expensive to fly in this country. A 2016 report on transportation in Canada for the federal government, led by former cabinet minister David Emerson, said Canadians pay “relatively high airfares, in part due to the lack of competition on many routes.”
While such mergers may seem inevitable, and the Competition Bureau is widely perceived as toothless, the recent outcome of the merger of two northern airlines suggests that the Air Canada-Transat deal could face scrutiny.
First Air and Canadian North last fall announced a deal to merge. The two Indigenous-owned carriers said the merger was an essential foundation for a single, sustainable northern airline. They also promised more flights and destinations.
The Competition Bureau did not mince words in its February report to the minister of transport. “The commissioner is of the view that the proposed transaction can be characterized as a merger to monopoly in the vast majority of the parties’ overlapping [routes] and is likely to lead to significant and materially higher prices and lower quality services for air passengers and cargo customers.”
The federal government approved the deal in mid-June, a decision that Ottawa said strikes a balance between the public interest and “the need to have a more efficient and financially sustainable” northern airline. Ottawa allowed a reduction in competition. However, it at least did so with terms and conditions. These include keeping passenger and cargo prices where they are for seven years, aside from increases in operating costs, as well as no reductions in weekly scheduled flights on all routes of the airlines’ combined network. The airlines also have to establish an independent advisory board that will, among other things, monitor “anticompetitive behaviour.”
The result gives some hope that Ottawa will consider the downsides of Air Canada’s takeover of Transat.
But, with another large upheaval in the Canadian airline business this year – Onex’s $3.5-billion acquisition of WestJet has been approved by Ottawa and likely will be backed by shareholders – there are bigger questions that need consideration to improve competition in Canada’s skies.
An immediate move Ottawa can make is to remove restrictions on foreign capital invested in Canadian airlines that fly only domestic routes. The current foreign investment limit is 49 per cent. Consider the long list of defunct discount carriers over the past two decades, from Canada 3000 to CanJet.
Competitors to Air Canada and WestJet face formidable foes that are effectively a duopoly with control of more than 90 per cent of domestic air traffic. The Competition Bureau is currently investigating WestJet for possible predatory pricing against fledgling Flair Airlines. The absence of successful low-cost carriers in Canada – a standard feature of markets around the world – is cause for serious concern. Ottawa should consider at least a partial opening of Canada’s airline market to outside capital.
Another lever Ottawa has direct control over is the array of charges it effectively levies on air travellers. Mr. Emerson’s 2016 report cited “onerous rents and taxes” and found such costs undermine the competitiveness of the airline industry in Canada.
The Competition Bureau and the federal government displayed rigour and even a bit of spine in the case of First Air-Canadian North. The same, and more, must be exercised in considering the merits of the deal between Air Canada and Transat.