Mergers: European Commission opens in-depth investigation into Air Canada's proposed acquisition of Transat Air

On 25 May 2020, the European Commission decided to open an in-depth investigation under the EU Merger Regulation into the acquisition of Transat by Air Canada. The Commission is concerned that the acquisition could reduce competition in the civil air transport sector between the European Economic Area (EEA) and Canada. The final decision of the Commission is expected by 30 September 2020.

The proposed takeover of Transat by its compatriot Air Canada, which was approved in August 2019 by shareholders for a total amount of C$720 million (EUR 485 million), raises rather unsurprisingly a few problems for the European and Canadian competition authorities. Indeed, after the Canadian Competition Bureau, which already gave a negative opinion on the merger between Transat and Air Canada in March, it is now the European Commission that has decided to open an in-depth investigation into this proposed merger.

It should be recalled that according to Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations, proposed concentrations with a European dimension are subject to a procedure of prior notification to the European Commission. The Commission allows projects that do not significantly impede effective competition, in particular by creating or strengthening a dominant position. As a reminder, in the air transport sector, the Commission examines the impact of a concentration on a route-by-route basis.

The two Canadian airlines, Air Canada and Transat, are respectively number one and number two in air passenger transport between Europe and Canada.  The European Commission found in the preliminary phase of the notification procedure that the activities of these companies are largely complementary and that they have historically been "head-on" competitors on the majority of Canada/EEA air routes.

According to the Commission's preliminary investigation, competition could be reduced on 33 origin and destination city pairs between the EEA and Canada, including 29 origin and destination cities for which both companies offer direct services and four for which one offers direct flights and the other indirect flights through one of its hub airports.

The Commission noted that in 2013, Air Canada launched its subsidiary Air Canada Rouge to enter the market for low-cost leisure travel between Canada and the EEA, competing directly with Transat, while the European airlines only operated on a limited basis on these routes and therefore remained marginal competitors.

Thus, the Commission is of the opinion, at this stage of the procedure, that WestJet, which is also active on the market for Canada/EEA air routes, cannot exercise a sufficient competitive constraint on the merging entity for the air routes in question.

On the basis of the information available to it at the end of the first phase of the investigation, the Commission considered that it was not in a position to determine whether, in the long term, the two airlines would continue to compete with each other on all routes where they were competitors before the crisis. In any event, the Commission's preliminary view is that Air Canada and Transat remain the closest potential competitors on the EEA-Canada routes in general and on the origin and destination city pairs examined by the Commission in particular.

Phase II of the investigation will allow the parties to submit the necessary information to the Commission and will possibly lead to a proposal for commitments to appease the Commission's concerns. These commitments may relate to the withdrawal of certain routes or even the abandonment of slots at the airports in question. The Commission's final decision is due on 30 September 2020.

Annabelle Lepièce, Partner, Brussels