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Air Canada-Transat Merger Stokes Fears Canada’s High Airfares Will Get Even Worse

The Competition Bureau has the opportunity to change the rules ahead of a major airline merger. Will it take it?

This story is the second in HuffPost Canada’s UNFRIENDLY SKIES, a three-part series that looks at the impact of rapid airline industry changes on Canadian passengers.

MONTREAL ― Canadian travellers deal with some of the world’s highest airfares per kilometre, and the likely merger of two Montreal-based carriers ― Air Canada and tour operator Transat A.T. ― could make things worse, some advocates and analysts fear.

The silver lining for consumers here is that the federal Competition Bureau has the opportunity to step in and change the deal ― and some analysts feel that’s likely to happen.

According to activist group Air Passenger Rights, the new combined airline would have “quasi-monopolistic” powers in the trans-Atlantic and sunny destinations parts of the air travel market, controlling 62 per cent and 46 per cent of those markets, respectively.

Air Passenger Rights Canada
Air Passenger Rights Canada

Using a measure of market concentration known as an HHI score, the group concluded both markets would go from being “moderately concentrated” to “highly concentrated.”

“One thing that’s clear from Economics 101 is that having a quasi-monopolistic market may be in the best interest of those large airlines, but everybody (else) is losing on it,” said Gabor Lukacs, head of Air Passenger Rights.

Passengers preparing to board an Air Transat jet leaving Cuba, Feb. 19, 2016.
Roberto Machado Noa via Getty Images
Passengers preparing to board an Air Transat jet leaving Cuba, Feb. 19, 2016.

The deal has yet to gain approval from the federal government, and will likely need clearance from the Competition Bureau. If approved, it would mark a “tectonic change” in Canada’s airline industry, Lukacs said in an interview with HuffPost Canada.

But some market experts say the federal Competition Bureau ― which will likely review the merger before government approval ― could temper some of its impact.

Fred Lazar, an associate professor of economics at York University’s Schulich School of Business, said he expects the Bureau to order Air Canada to relinquish some airport slots in Toronto and Montreal, as a condition for approving the deal.

“The Competition Bureau is not going to approve the merger as is,” he told HuffPost Canada.

The Bureau could also call for regulators to give foreign airlines “cabotage” in Canada, Lazar and others note.

For instance, a U.S. airline like United could fly from Chicago to London via Toronto, picking up Canadian passengers in Toronto and dropping them off on the way back. This is currently not allowed in Canada and many other countries, but could help bring competition to the market, Lazar and others argue.

“That would be a very great, significant improvement,” Lukacs said. “It would be interesting to explore whether those airlines would be interested in transporting passengers within Canada.“

Playing politics?

Lukacs and some other observers suspect that the Air Canada-Transat tie-up may have been more a political decision than a business one.

They note that Transat’s financial problems stoked concerns in Quebec that Montreal could lose yet more head office jobs. The Air Canada buyout assuages those concerns, as Air Canada is also headquartered in Montreal.

As evidence that “something doesn’t pass the smell test” on this deal, Lukacs notes that Transat actually had a higher offer on the table than the one Air Canada offered. Real estate company Groupe Mach offered $14 a share for Transat, compared to Air Canada’s $13 a share bid. Transat’s board largely ignored the higher offer.

He says that while he feels “profound sympathy” for Transat employees, he’s “not convinced it is the right decision to make all passengers (in Canada) pay for the cost of those people keeping their jobs.”

Transat A.T.'s headquarters in Montreal, Nov. 30, 2017.
aetb via Getty Images
Transat A.T.'s headquarters in Montreal, Nov. 30, 2017.

He added: “Giving help to the employees is fine, but I don’t like the idea of an airline that’s too big to fail. It feels like it’s capitalism for the average citizen, for airline passengers, but it’s socialism for the corporations. That doesn’t sit well with me.”

But industry analysts largely don’t feel this was political. They point out that Groupe Mach is a real estate company mostly interested in Air Transat’s real estate (hotel) holdings.

A property company buying Transat A.T. is “like the tail wagging the dog,” said Karl Moore, a professor at the Desautels Faculty of Management at McGill University. He added there was also some question about whether Groupe Mach had the money to buy Transat.

“It feels like it’s capitalism for the average citizen, for airline passengers, but it’s socialism for the corporations.”

- Gabor Lukacs, Air Passenger Rights Canada

“What you get is a real estate company buying an airline that has a fair bit of real estate…. Whereas Air Canada is an airline and not interested in hotels.”

And if airfares do go up, that “might convince others to jump in” to those routes where Air Canada is making a killing, Moore said, noting WestJet’s new, deeper pockets thanks to its buyout by Onex Corp.

“Transat had some financial problems. It would have been worse if they’d shrunk or gone out of business,” he said.

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