(This note is not part of the Order.)
Proposal
This Order in Council (Order), issued pursuant to subsection 53.2(7) of the Canada Transportation Act (Act), approves the proposed acquisition of Transat A.T., Inc. (Transat) by Air Canada (the “Proposed Transaction”), subject to the Terms and Conditions set out in the annexed schedule.
Objective
The objective of this Order is to approve, subject to certain Terms and Conditions (see Schedule to the Order), the Proposed Transaction, which the Minister of Transport has recommended to be in the public interest. The public interest considerations take into account the extraordinary impact that the COVID-19 pandemic has had on the air sector in Canada, as well as efficiencies and other economic benefits that would result from the acquisition.
The Terms and Conditions establish mitigating measures to address concerns with respect to the effect of the Proposed Transaction on the public interest. The Terms and Conditions are largely based on measures that were proposed by the Parties in the form of undertakings, under subsection 53.2(5) of the Act, to address competition and public interest concerns arising from the Proposed Transaction; these undertakings were finalized by the Parties following consultation with the Minister and the Commissioner. The Terms and Conditions form part of the Order and are therefore enforceable under the Act. The Terms and Conditions will be administered in accordance with an Implementation and Monitoring Agreement (Agreement). The Agreement will set out the administrative details around how the Parties will implement the Terms and Conditions and will further provide that the Minister will measure and monitor compliance through an independent monitor. The Terms and Conditions require that the Parties’ enter into the Agreement prior to the closing of the Proposed Transaction.
Background
On June 27, 2019, the Parties announced a definitive agreement regarding the Proposed Transaction. On July 17, 2019, the Parties filed an acquisition notification with the Minister, pursuant to subsection 53.1(1) of the Act, and also with the Commissioner of Competition (Commissioner) and the Canadian Transportation Agency.
On August 26, 2019, the Minister determined that the Proposed Transaction raised public interest considerations relating to national transportation and therefore triggered a 150-day formal public interest review, as required by the Act. Given the complexity of the Proposed Transaction, the Minister also exercised his authority pursuant to subsection 53.1(6) to provide an extension (in this case, 100 days) to Transport Canada to complete its review of the Proposed Transaction. Likewise, the Minister granted two extensions to the Commissioner (totaling 110 days), in accordance with subsection 53.2(2) of the Act, to complete the Commissioner’s report.
On March 27, 2020, the Minister received the report of the Commissioner issued under subsection 53.2(2) of the Act, setting out the Commissioner’s concerns regarding the potential prevention or lessening of competition as a result of the Proposed Transaction. On the same date, as per subsection 53.2(3) of the Act, the Commissioner’s report was made public.
On May 2, 2020, the Minister received from Transport Canada the Public Interest Assessment (PIA) referred to in subsection 53.1(6) of the Act. Pursuant to subsection 53.2(4) of the Act, the Minister consulted with the Commissioner regarding any overlapping concerns between the Minister’s PIA and the Commissioner’s Report, and on May 25, 2020, the Minister requested that the Parties address with the Minister the Minister’s concerns, and with the Commissioner the Commissioner’s concerns.
On May 14, 2020, the Canadian Transportation Agency determined that the resulting entity after the Proposed Transaction is complete would be Canadian under 53.2(1) and 53.3 of the Act.
The report of the Commissioner on the potential prevention or lessening of competition, and the PIA on the effect the Proposed Transaction may have on the public interest as it relates to national transportation were largely based on information that pre-dated the devastating impact that the COVID-19 pandemic has had on the global air transportation sector, including in Canada, as they were written at a time when these impacts were not yet fully understood.
The pandemic led the Parties to renegotiate certain terms of the Proposed Transaction, most notably the purchase price. On October 10, 2020, the Parties announced a revised agreement for the Proposed Transaction.
Transport Canada officials sought additional information from the Parties and, using external expert advisors, conducted additional analysis on the effect that COVID-19 would have on the analysis conducted pre-pandemic, and the Parties were also provided with information on analysis conducted with respect to that effect.
The Parties then proposed detailed measures that they were willing to undertake to address identified competition and public interest (as it relates to national transportation) concerns to each of the Minister and the Commissioner pursuant to subsection 53.2(5) of the Act. These undertakings were finalized by the parties following consultation with the Minister and the Commissioner.
The Minister received the Commissioner’s assessment of the adequacy of the Parties’ proposed undertakings on December 9, 2020, in accordance with subsection 53.2(6) of the Act. In the Commissioner’s view, the proposed undertakings do not conform to the principles of merger remedy design and are unlikely to result in effective entry for new competitors.
Implications
In making his recommendation to the Governor in Council, the Minister considered whether it would be in the public interest to approve the Proposed Transaction, and if terms and conditions were necessary, taking into account: the benefits and concerns raised in the PIA and in the Commissioner’s report; the measures proposed, in the form of undertakings, by the Parties to address both the public interest as it relates to national transportation and competition concerns; the Commissioner’s assessment of the proposed undertakings; and the potential benefits of the Proposed Transaction in the context of the impact of COVID-19 on Canada’s air transport system.
Economic and Social
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a) Commissioner’s Report
The Commissioner particularly noted the increased market share for non-stop travel that would be controlled by the Parties following the Proposed Transaction. Concerns centered on the likelihood of price increases, reduced choice for travellers, decrease in service, and a reduction in demand for air passenger services and vacation packages as a result of price increases in the areas of overlap between the Parties’ networks.
The Commissioner also identified structural barriers to entry for potential competitors to replace Air TransatFootnote [1] as an independent entity, including challenges for gaining slots at slot-constrained airports in Canada and Europe.Footnote [2]
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b) Transport Canada’s Public Interest Assessment
Transport Canada conducted internal research, and also retained an external expert to undertake economic analysis and a business valuation of the Proposed Transaction. Transport Canada officials also took the Commissioner’s conclusions into consideration.
The PIA, which was finalized on May 2, 2020, found that the Proposed Transaction could lead to less choice and significant price increases for Canadian travellers and international tourists. The PIA concluded that these impacts would be significantly more pronounced on European destinations than sun destinations, mostly as a result of the substitutability of sun destinations by travellers and the presence of more competition coming from Canadian carriers on sun routes. While negative impacts on competition would clearly not occur in the face of the severe decline in travel demand wrought by COVID-19, such impacts would likely occur as the market recovers in future.
On the other hand, the Proposed Transaction could bring greater operating and network efficiencies to the acquired entity that would generate benefits for travellers, such as the introduction of new routes, enhanced connectivity, time savings and cost savings achieved by reducing double marginalization. Double marginalization takes place when a passenger travels with two unaffiliated airlines on different legs of a connecting journey, and is thus charged a mark-up by both carriers. The Proposed Transaction could also bring about other economic benefits to the wider aerospace sector, including increased employment.
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c) Impacts of COVID-19
The COVID-19 pandemic was a key factor in the final assessment of whether or not the Proposed Transaction would be in the public interest.
At the time this explanatory note was prepared, Canada and the rest of the world were still gripped by the second wave of COVID-19. While more is now known about the impacts of COVID-19 on the global air sector, the sector’s recovery trajectory is still unclear. Business leaders and the International Air Transport Association continue to shift and revise recovery forecasts for the global air sector. It is clear, however, that the impacts to date have been extremely significant for the air transport industry, and recovery will take some time.
The great reduction in demand for air travel as a result of the COVID-19 pandemic has reduced the immediate significance of the competition concerns as expressed in the PIA, pending recovery. One example of this reduction in demand is Air Canada’s decision to retire Rouge’s entire fleet of Boeing 767s, while exiting most of the leisure European routes it previously served in direct competition to Transat. At the same time, it is doubtful that some of the benefits for travellers forecasted in the Parties’ original proposal, such as the creation of new routes, would fully materialize. However, the Proposed Transaction may provide operating efficiencies to the wider Canadian air transportation system that may be beneficial as it recovers from the pandemic. The Proposed Transaction would also help stabilize and maintain some employment in the air sector.
Moreover, all air carriers are facing a difficult financial situation in the face of the pandemic, and Transat’s most recent financial reporting (Fourth Quarter 2020) clearly identified challenges for the company, including the need to raise significant financing to continue operating and compensate for ongoing losses. As a result, it cannot be assumed that Transat, as an independent entity, would retain the ability to offer the same level of connectivity and competition to Europe following the pandemic that it did when the Proposed Transaction was first announced. Thus, rejecting the Proposed Transaction would not necessarily serve to mitigate the loss of competition identified in the PIA and in the Commissioner’s initial report because much of this service could be lost anyway, including the 29 routes that Transat previously operated overlapping with Air Canada, and 17 standalone routes. In fact, allowing the merger could have the impact of maintaining more connectivity and competition on routes to Europe because the undertakings committed to by the Parties would encourage new entrants on Transat’s previous routes. Allowing the acquisition would provide a clear and stable future for Transat and Canada’s air transport sector in general and would also yield benefits in terms of network and operating efficiencies, as well as employment.
Terms and Conditions
Approval of the Proposed Transaction is contingent on ensuring that net public interest benefits are realized, while at the same time addressing competition and/or public interest concerns. To this end, the Minister and the Commissioner shared their concerns about the Proposed Transaction with the Parties, pursuant to subsections 53.2(4) and (5) of the Act. The Parties then proposed measures in the form of undertakings, under subsection 53.2(5) of the Act, to address the competition and public interest concerns as related to national transportation arising from the Proposed Transaction.
The measures, which are outlined in the Terms and Conditions, and attached as a Schedule to the Order, were designed to address a number of these concerns, including: mitigating competition concerns on European routes; ensuring the introduction and operation of new routes; maintaining a certain level of employment; maintaining Transat’s brand and head office; and facilitating potential benefits that could accrue to the Canadian aerospace sector. Additionally, Air Canada will also be required to provide information on price changes in affected markets, which will allow the federal government to monitor the situation and inform Canadians of the results.
In a letter dated December 9, 2020, the Commissioner provided the Minister with his assessment of the adequacy of the proposed measures put forward by the Parties to address the competition concerns. The proposed measures, in the Commissioner’s view, are inadequate; do not conform to the principles of merger remedy design; and are unlikely to result in effective entry for new competitors. Based on his experience and expertise, the Commissioner’s view is that there are significant deficiencies in the undertakings proposed by the Parties, such that they do not address the competition concerns likely to result from the merger of Air Canada and Transat.
The Commissioner notes that measures have been proposed only on a limited number of the 81 routes on which he perceived a need for measures following a thorough review of available evidence from the Parties about their future plans independent of the Proposed Transaction. The Commissioner also indicated that the Competition Bureau’s market research concluded that the likelihood of new entrants is low. For the one structural remedy proposed by the Parties (slot surrender), the Commissioner noted some additional concerns, including potential issues around implementation of the slot surrender remedy at Toronto’s Pearson airport and Montreal’s Trudeau airport. The Commissioner did not propose any additional remedial measures.
Some further undertakings were offered by the Parties following receipt of the Commissioner’s report, such as a price monitoring mechanism, additional slots at Schiphol Airport in Amsterdam, and longer terms associated with slot surrender and other measures intended to attract other operators on European routes.
The Act requires that the Commissioner of Competition provide views on competition concerns as he is the expert in those questions. Ultimately, according to the Act, it is the responsibility of the Minister to make the final recommendation to the GiC, having considered, on balance, the Commissioner’s views as well as the public interest as it relates to national transportation.
The Minister must consider a large number of public interest considerations, such as connectivity, wider social and economic implications, the financial health of the air transportation sector, and competition considerations. The Minister must weigh these factors against each other and determine whether, on balance, the Proposed Transaction is in the public interest. This does not mean that all the concerns in one area must be resolved, but rather that the overall benefits should outweigh the concerns.
Having considered all of the various public interest factors, the Minister is of the opinion that, subject to the following Terms and Conditions, the acquisition would be in the public interest. The Terms and Conditions touch on seven key areas of concern:
Competition and Public Interest Measures
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Slot Dominance
Terms and Conditions have been designed to minimize the impact of the acquired entity’s slot dominance at Montreal-Trudeau and Toronto-Pearson airports on routes to European destinations, thereby facilitating the future emergence of new entrants and increased competition on these routes. “Slot surrender” is a structural competition remedy commonly used in airline mergers and acquisitions as a way of limiting the dominance of the merged carrier and promoting competition. The goal of slot surrender is to attract new entrants, which in turn, brings with it a number of spinoff public interest benefits, such as competitive pricing, improved connectivity, and increased consumer choice. The slot surrender remedy mechanism would apply on a relevant city-pair basis. In response to concerns raised by the Commissioner and in the PIA, new entrants will have the opportunity to avail themselves of increased access to airport infrastructure at relevant Canadian airports. In addition to the slot surrender and airport infrastructure commitments, new entrants will be able to avail themselves of interline and fare-combinability agreements with Air Canada to offer feeder service within Canada and a full schedule; give their customers access to Air Canada’s frequent flyer (Aeroplan) points program; and allow customers access to the Maple Leaf lounges at specific Canadian airports. These additional measures would serve to enhance a new entrant’s competitiveness with the acquired entity when starting a service on these routes, and would be available to eligible new entrants for periods of five or ten years, depending on the relevant city-pair, upon the closing of the Proposed Transaction.
Public Interest Measures
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Transat Business
For five years following Closing, Air Canada shall maintain a head office for the Transat Business in the Province of Québec and the Transat Brand for the Transat Business.
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Employment
A minimum level of employment of 1,500 employees in connection with the combined leisure business of Air Canada and Transat would be maintained for two years upon closing. This commitment would be maintained regardless of pandemic-related or other developments that could further negatively affect the air sector in this two-year period. The level of employment in these areas is currently significantly less than 1,500.
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New Destinations
Five new international (including transborder) destinations that were not offered in 2019 would be introduced to improve connectivity for travellers. The new routes introduced through this commitment would be operated for a minimum of two years.
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Maintenance in Canada
Air Canada would enter into maintenance contracts for certain types of aircraft with Quebec-based suppliers within one year of closing, which could result in Canadian aerospace sector benefits from the Proposed Transaction.
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New Markets
Barriers to entry would be reduced for other Canadian air carriers seeking to enter the Colombia, Israel, and Panama markets where access was previously granted to Air Transat. Capacity was previously granted to Air Transat under Air Transportation Agreements with these countries. This commitment, which will be in place for five years from closing, allows the Minister to reallocate capacity to new entrants wishing to introduce services to these markets.
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Price Monitoring
Air Canada will systematically share pricing information with the Government of Canada as a means of monitoring pricing post-acquisition. Information will be shared on routes where the Parties previously offered overlapping service to both European and sun destinations. This commitment will remain in place for five years upon closing. The Government will inform the public of the results.
Implementation
The Terms and Conditions will require the Parties to enter into an Implementation and Monitoring Agreement before closing.
If there is a disagreement over the interpretation of any of these Terms and Conditions that cannot be resolved via the dispute resolution mechanisms contained in the Implementation and Monitoring Agreement, subsection 53.6(2) of the Act could apply if any of the Terms and Conditions of the Order are violated: “Every person who contravenes subsection 53.2(1) or (10) is guilty of an indictable offence and is liable to imprisonment for a term not exceeding five years or to a fine not exceeding $10,000,000, or to both.” As well, under subsection 53.4(1) a superior court may, on application by the Minister, order the cessation of a contravention of the Terms and Conditions, or any other order it deems appropriate, including the divestiture of assets. Similarly, subsection 53.4(2) allows the Commissioner to make an application to a superior court if there is a contravention with respect to a term or condition that relates to potential prevention or lessening of competition.
Consultation
As part of Transport Canada’s public interest assessment, extensive consultations were undertaken with industry stakeholders, as well as the general public, from November 4, 2019 until January 20, 2020. The consultation process included the following channels for input:
- Stakeholder meetings: 34 bilateral consultation meetings took place with consumer advocacy groups, airlines, industry associations, and other relevant stakeholders.
- Written submissions: 54 formal written submissions were received from individual Canadians, consumer advocacy groups, airlines, industry associations, and other interested stakeholders, either via the consultation website or a specific email address used for the consultations. Air Canada and Transat also provided a joint written submission.
- Online forum and submission portal: Transport Canada’s consultation website (www.letstalktransportation.ca) provided a discussion forum and portal for submissions. There were 4,048 web visits and 228 comments (195 in English and 33 in French) posted on the discussion forum. Of these, there were 130 individual contributors in English and 31 in French.
The consultations brought forward a wide range of views. Some groups expressed support for the Proposed Transaction, other groups were opposed, and others presented mixed views.
Those that were in favour noted that the acquired entity would benefit from combined expertise and a strengthened global position, and that the Proposed Transaction would yield increased connectivity; increased trip frequencies; a renewed focus on tourism, exports, and investment; and local economic benefits.
Those opposed to the Proposed Transaction raised concerns that it could result in job losses, and that the Transat brand could disappear. Some groups worried that there would be negative impact on competition in a post-acquisition environment, resulting in higher fares and decreased service offerings. Concerns were also expressed that airline suppliers would suffer due to reduced bargaining power when dealing with one large supplier as opposed to two separate companies. Some of the concerns raised focused particularly on transatlantic travel, as a market where Transat traditionally competes with Air Canada.
A subsequent consultation process was initiated once the Parties proposed measures they were willing to undertake. Transport Canada consulted with the Commissioner, as well as with the Toronto-Pearson and Montreal-Trudeau airports on measures of particular relevance to their respective operations. In consulting with the Commissioner, Transport Canada received the results of the Competition Bureau’s market testing on the proposed measures, which provided views from key stakeholders. Transport Canada duly considered the Commissioner’s views, as well as the views of other stakeholders around specific undertakings.
Conclusion
Further to the Minister’s recommendation, having taken into account all relevant factors, including the Commissioner’s assessment of competition issues, the public interest issues relating to national transportation, and the measures proposed by the Parties to address any concerns raised as part of the process, the Governor in Council is satisfied that it is in the public interest to approve the Proposed Transaction subject to the Terms and Conditions in the Order made pursuant to subsection 53.2(7) of the Act.
The merger will provide greater stability to Canada’s air transport sector in the context of the COVID-19 pandemic, and particularly when taking into consideration the financial challenges faced by Transat. The Terms and Conditions will ensure that measures are in place to facilitate and incentivize new entrants to take up former Transat routes to Europe. The Terms and Conditions also alleviate concerns with respect to the preservation of the Transat head office and brand and the potential for greater job losses among Transat employees. They also provide opportunities around ongoing aircraft maintenance work in Canada. The merger will result in operating and network efficiencies that would generate benefits for travellers, such as the introduction of new routes, enhanced connectivity, time savings and cost savings achieved by reducing double marginalization. Finally, safeguards will be in place to monitor pricing on routes where the Parties previously offered overlapping service to both European and sun destinations.
Contact
For additional information, please contact:
Director
National Air Services Policy (ACEB)
Air Policy Group
Transport Canada
Place de Ville, Tower C
330 Sparks Street
Ottawa, Ontario K1A 0N5
General inquiries:
Email: TC.natair-aernat.TC@tc.gc.ca
Website: tc.canada.ca