Jun 20 2019
Over the five years to 2019, the Scheduled Air Transportation industry in Canada (IBISWorld Report 48111CA) took flight as rising levels of disposable income enabled more consumers to purchase airline tickets. During the five-year period, revenue increased at an annualized rate of 4.1% to total $26.4 billion. Furthermore, the relatively weak Canadian dollar encouraged substantial inbound travel from foreign consumers, while declines in the world price of crude oil reduced industry purchase costs.
Although this enabled airlines to invest in new aircraft, improved amenities and new technologies to reduce costs through automation, profit margins remained constrained due to mounting internal competition in this highly concentrated industry. Additionally, this trend shows no signs of stopping; over the five years to 2024, anticipated merger and acquisition activity among the industry’s largest operators is anticipated to reshape the competitive landscape.
The industry is characterized by a large geographic territory with a limited number of high-density markets that account for the majority of passenger traffic and revenue. This leads to routes being concentrated around four major hubs: Toronto, Montreal, Vancouver and Calgary.
Industry concentration is further bolstered by high barriers to entry, such as capital costs, regulatory barriers, limited capacity within existing networks and incumbent player competition. In 2019, the industry’s two largest players, Air Canada and WestJet Airlines Ltd., accounted for combined 85.1% of total market share, capturing 67.5% and 17.6% of industry revenue, respectively. New operators do not have the ability to significantly challenge the market power of the existing operators, which possess both financial advantages and extensive linkages and partnerships.
In May 2019, Air Canada announced plans to acquire Air Transat, a Montreal-based leisure airline subsidiary of Transat AT Inc., for an estimated $520.0 million. However, mere weeks after the offer, Quebec-based real estate developer Group Mach Inc. outbid the airline behemoth with a conditional offer to purchase the airline for $14.0 per share, higher than Air Canada’s offer of $13.0 a share.
Although Air Canada and Transat are locked in an exclusive 30-day negotiating period set to expire near the end of June, the counteroffer signified the industry’s attractive growth prospects and fierce competition. If the original deal is approved, the transaction would substantially expand Air Canada's network, making the company even more competitive in this highly concentrated market. Air Transat currently operates scheduled and charter flights to 60 destinations in 25 countries, which would expand Air Canada’s leisure travel business amid rising competition from WestJet. In 2019, Air Canada on its own is expected to generate an estimated $17.8 billion in industry-relevant revenue.
In the same month Air Canada announced its acquisition plans, the private equity firm Onex Corporation reached a tentative deal to purchase WestJet for $5.0 billion. The deal, subject to subject to approvals from shareholders and Canadian regulators, is anticipated to close in the latter part of 2019 or early 2020. WestJet, which is anticipated to generate $4.6 billion in industry-relevant revenue in 2019, has appealed to Canadian consumers due to its low-cost fares and regional routes. The acquisition is anticipated to expedite the airline’s ongoing shift from a low-cost regional carrier to a full-service international airline.
Notably, this isn’t Onex’s first attempt to acquire an airline. Nearly 20 years ago, the company partnered with American Airlines Inc.’s parent company, AMR Corporation, in a bid to acquire and merge the now-defunct Canadian Airlines International Ltd. into Air Canada.
However, even if all parties agree to the terms, the future of these deals is still uncertain. Under the Canada Transportation Act, the minister of transport must make a determination on both deals, which includes an assessment of the public interest relating to transportation. If Air Canada’s acquisition of Air Transat is approved, the latter will benefit from Air Canada’s existing carrier alliances, extensive network infrastructure, more-efficient aircraft use and higher passenger volumes.
Should Onex’s acquisition of WestJet be approved, the airline will transition to a privately-held company. The acquisition will also provide WestJet with funds to continue its rapid expansion, thereby heightening competition between the industry’s two largest players. Despite uncertainty surrounding the industry’s competitive landscape, revenue is still forecast to increase at an annualized rate of 1.7% to $28.7 billion over the five years to 2024.
Edited by Kieran Newton
Infographic design by Tafannum Rahman