Air Transat/Air Canada: Phase 2 Investigation Indicates Further Delays in Transaction

Relevant Document:
Air Transat Release

Takeaways
 

• The European Commission’s decision to refer the investigation of Air Canada’s acquisition of Air Transat to a Phase 2 review indicates that the transaction may be subject to further delays, as the regulator and Canadian politicians weigh the anticompetitive effects of the merger against the uncertainty surrounding the airline industry.
• The new provisional deadline of the Phase 2 investigation is Sept. 30. However, “there is risk that it will go on longer,” according to Gavin Bushell, a partner at Baker McKenzie in Brussels.
• Air Transat announced yesterday, May 25, that it would “activate the first one-month extension” of the outside date set for the transaction, postponing the end date to July 27 from June 27. The arrangement agreement allows either party to postpone the deadline for three one-month periods.
• Air Transat also said that the arrangement is now expected to close in the early fourth quarter of 2020.

The European Commission’s decision to refer the investigation of Air Canada’s acquisition of Air Transat to a Phase 2 review indicates that the transaction may be subject to further delays, as the regulator and Canadian politicians weigh the anticompetitive effects of the merger against the uncertainty surrounding the airline industry.

As Reorg reported, the European Commission’s Directorate-General for Competition, or DG Comp, announced yesterday, Monday, May 25, that it launched an in-depth investigation into the transaction and provided a provisional deadline of Sept. 30. Although both Transport Canada and the Canadian Competition Bureau have completed their separate reviews of the transaction, Marc Garneau, the Canadian transport minister, has no statutory deadline to release his recommendation to the federal cabinet.

In response to DG Comp’s in-depth investigation, Air Transat announced on Monday that it would “activate the first one-month extension” of the outside date set for the transaction, postponing that date to July 27 from June 27. The arrangement agreement allows either party to postpone the deadline for three one-month periods. Air Transat further said that the arrangement is now expected to close in the early fourth quarter of 2020.

Meanwhile, Air Canada has been particularly quiet regarding the deal, prompting airline industry observers to speculate whether Air Canada is still enthusiastic about the transaction. In response to Reorg’s inquiries, an Air Canada spokesperson told Reorg that DG Comp’s decision was part of the normal regulatory process and declined to comment further.

“Normally, Air Canada gets what it wants in Canada,” a Canadian airline industry stakeholder told Reorg. “However, the world has changed, and Air Transat’s stock prices have plummeted.”

While Garneau is looking at the Competition Bureau’s report on the transaction’s effect on competition, he also is examining Transport Canada’s public interest assessment, which is not publicly available. Generally, public interest assessments conducted by Transport Canada examine operating and network efficiencies, fares, passenger, experience, trade, innovation and investment, employment, safety, environment and tourism.

However, Garneau’s primary concern in examining this transaction has likely shifted now because of the pandemic’s devastating impact on air travel, and he is likely focused on how to preserve Canada’s airline industry during and after the pandemic, the stakeholder told Reorg. He added that Canada’s and DG Comp’s delay in making its decision in the transaction likely benefits Air Canada, as it too is likely awaiting more clarity on the pandemic’s impact on the industry.

European Review

While DG Comp’s provisional deadline for its review of the transaction is Sept. 30, “there is risk that it will go on longer,” according to Gavin Bushell, a partner at Baker McKenzie in Brussels. The commission’s 90-working-day timeline for a Phase 2 investigation can be extended by 15 working days if the companies offer commitments in the latter part of the review. Additionally, along with the commission’s ability to stop the clock, further extensions of up to 20 working days can be granted on request by, or with the agreement of, the companies.

Bushell said that parties may not propose commitments during Phase 1 if they think DG Comp may find an issue with the transaction that will take time to resolve. Rather than offer remedies to extend the Phase 1 deadline by 10 working days, the companies may prefer to head straight into Phase 2, during which they can make extended arguments related to market definition or failing firm defense, Bushell said.

During the Phase 2 investigation of Air Transat/Air Canada, there are likely to be “long discussions about various avenues to get approval” from the commission, Bushell said. Since the airline industry has taken a significant financial hit because of the coronavirus pandemic, one such avenue may be the failing firm defense, he added.

However, absent the failing firm defense, which is difficult to prove, “normal competition rules still apply,” Bushell said. He noted that while the European Commission has said it is sympathetic to current market conditions, it has made clear that “coronavirus is not a free pass” for companies and that it will work “to ensure the proper application of competition rules.”

The airlines could have also refrained from submitting proposed commitments during DG Comp’s Phase 1 because of their ongoing discussions with Canadian officials, which are further along, explained Subrata Bhattacharjee, a Canadian antitrust practitioner who is closely following the transaction. “So, it may not be simple to offer remedies to one because that might not meet the concerns of the other.”

As airlines have continued to struggle as a result of the coronavirus, governments have begun to step in to provide relief. The German government informed Deutsche Lufthansa AG this week that it approved the airline carrier’s €9 billion financial stabilization package. European budget airline Ryanair condemned the state aid, saying it will “further strengthen Lufthansa’s monopoly like grip on the German air travel market.”

Frédéric Jenny, competition committee chairman for the Organisation for Economic Co-operation and Development, previously stated that there is a higher level of risk for authorities to make errors in antitrust enforcement decisions since there is “no visibility” on the future of sectors affected by the crisis - such as air transport.

In a statement announcing DG Comp’s in-depth investigation of the Air Transat/Air Canada deal, Vestager said while this is a challenging time, particularly in markets severely affected by the coronavirus outbreak, “a return to normal and healthy market conditions must be based on markets that remain competitive.”

Reorg M&A’s previous coverage of this transaction can be found HERE.

--Kathryn Haake and Alex Wilts