On April 2, 2021, Air Canada announced that it had abandoned its plan to acquire Transat, a competing operator in the market for air transport services between Canada and the EEA. The deal was notified on April 16, 2020 and after one year of discussions and repeated suspensions of the investigation by the Commission, Air Canada decided to abandon the €127 million deal.

Hitting a wall: Air Canada’s withdrawal of its notification

On April 16, 2020, Air Canada notified its intention to acquire sole control over its competitor Transat for approximately €480 million at the time. Air Canada is Canada’s largest airline while Transat’s subsidiary, Air Transat, ranks third. The companies are respectively the first and second largest providers of scheduled passenger air transport services between the EEA and Canada.

On May 25, 2020, the Commission opened a Phase II investigation, raising concerns regarding 33 origin and destination (“O&D”) city pairs between the EEA and Canada, on 29 of which the parties offer competing direct flights. The Commission found that the parties were each other’s closest competitors because other airlines were active only on small subsets of routes.

Air Canada offered its first remedy package on November 25, 2020, after the Commission had suspended its investigation for the first time for two months. Among other commitments,[1] Air Canada offered to divest take-off and landing slots on a dozen transatlantic routes. The Commission rejected the initial package as insufficient, mirroring recent statements by Commission officials which seem to indicate a certain reticence with regard to slot divestments as an appropriate remedy, pointing to “mixed success” with slot remedies in the past.[2]

Moreover, the Commission shows increased interest in commitments for access to airport infrastructures. It therefore seems to require strong evidence that the slots offered are sufficiently attractive and competitive.[3] Negotiations lasted several months until the proposal of revised commitments. Air Canada later declared that the revised remedy package went “beyond the commercially reasonable efforts” that have been “traditionally accepted by the Commission in previous airline merger cases.”

Air Canada considered that any additional remedies would likely not win the Commission over and compromise its ability to compete internationally, in particular following the impact of the COVID-19 pandemic. When the Commission upheld its concerns despite the revised remedy package, Air Canada withdrew its notification on April 2, 2021.

The timeline below illustrates the main steps of the merger control procedure:

COVID-19 and failing firm defense – different standards across the Atlantic?

The transaction was notified to competition authorities in the midst of the COVID-19 pandemic, which has significantly disrupted the aviation sector at large. As a result, the acquisition of Transat was valued over €350 million less at the time of abandonment of the deal compared to the time when it was notified.[4] Unsurprisingly, Air Canada advanced a “failing firm defense” in Transat’s regard.

However, neither the Commission—nor ostensibly the Canadian Competition Bureau —found the conditions for a failing firm defense to be met. The Commission was not convinced that, absent the merger, Transat would be forced out of the market in the near future, or that its assets would inevitably exit the market.[5]

Indeed, Transat had extended a loan facility for over 250 million Canadian dollars as recently as in 2020, and failed to show that no further funding would be granted. Air Canada also failed to prove that Transat would not have found an alternative buyer. At the same time, the Commission had made clear that it would not apply the failing firm defense more flexibly in the context of the pandemic.[6]

On the other side of the Atlantic, however, the deal was cleared following an intervention by the Canadian Government, and despite opposition from the Canadian Competition Bureau. The Canadian Government based its conditional approval[7] on reasons of public interest, including the level of future (i.e., post-pandemic) air service, wider social and economic implications including potential job losses, the financial health of the air transportation sector, and future competition on Canadian routes.[8]

The Canadian Government underlined that the pandemic was a key factor in its final decision, in particular in view of the significant uncertainties concerning Transat’s ability to recover and continue operating after the crisis. In light of the expected consequences of the crisis, it concluded that the acquisition was the best probable outcome for market stakeholders and related industries.

The absence of a similar public interest intervention mechanism at EU level was Air Canada’s challenge in Europe. In spite of vociferous demands in recent years for an introduction of a public interest veto at EU level,[9] the Commission continues to found its assessment purely on competition grounds. Hence, the Commission distinguished between the temporary market impact of an acute crisis, such as the COVID-19 pandemic, and mid- to long-term effects of structural changes in the market.[10]

Yet, it seems unlikely that Air Canada’s case will revive the debate of EU reform and the introduction of political veto rights. Given that Canada’s veto would have benefitted primarily the region of Quebec, with anticompetitive effects continuing to threaten markets in Europe, the case may in fact more likely provide an argument against political unilateralism.

[1]      The other commitments offered were behavioural, in particular, Air Canada committed to allow competing airlines flying routes where competition concerns arose to sell return journeys with one leg being covered by Air Canada, and to carry connecting passengers taking long-haul flights operated by competing airlines.

[2]      See Henrik Morch (Director of the DG COMP Unit Markets and cases V: Transport, Post and other services) during the Concurrences Webinar “Competition in the Air Transport Sector After Covid-19,” November 25, 2020 (“H. Morch, Concurrences Webinar”).

[3]      In the present case notably, timing is of the essence. For example, a slot with flights leaving Canada early afternoon may not be competitive enough since passengers may land in Europe in the middle of the night. Similarly, the connection flights Air Canada offered to make available as a remedy might arrive too early or too late to the connecting airports to make them truly attractive to customers.

[4]      This decrease was also partly due to the remedies offered by Air Canada to have the deal approved.

[5]      For the European “failing firm” test, see Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, 2004/C 31/03, February 5, 2004, para. 90.

[6]      See H. Morch, Concurrences Webinar.

[7]      The conditions imposed by the Canadian Government included (i) the preservation of the Transat head office and brand in the province of Quebec; (ii) maintaining 1,500 employees in the new entity’s leisure travel business; (iii) a commitment to facilitate aircraft maintenance in Canada, and in particular in Quebec; (iv) a price monitoring mechanism; (v) an active encouragement by Air Canada of other airlines to take up former Transat routes to Europe; and (vi) a launch of new destinations from Canada within the first five years. See, the Canadian Government’s official press release of February 11, 2021, available at: https://www.canada.ca/en/transport-canada/news/2021/02/government-of-canada-approves-proposed-purchase-of-transat-at-inc-by-air-canada.html.

[8]      See Privy Council Office Order-in-Council number 2021-0070 of February 9, 2021.

[9]      As reported in our February 2019 EU Competition Law Newsletter. Similar veto powers exit for instance in France and Germany (“Ministererlaubnis”).

[10]    During its market test, the Commission had asked competitors to respond without taking the COVID-19 crisis into account, despite all uncertainty whether recovery in the air transport industry will in fact occur.