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Why Air Canada’s (TSX:AC) Acquisition of Transat (TSX:TRZ) Could Fall Through

David Jagielski
Aircraft wing

There have been some seismic moves in the airline industry this year, particularly in Canada. The biggest may have been when WestJet Airlines announced that it was going private. In addition to that, rival Air Canada (TSX:AC)(TSX:AC.B) was purchasing Transat AT (TSX:TRZ). Both of these moves could have an impact on competition in the industry but in very different ways.

WestJet going private means that there could be a change in responsibilities and goals for the company. Sometimes that could result in an even greater focus on cost-cutting or whatever else the new owner may want to make a priority. However, it doesn’t result in fewer options for travellers. The Air Canada purchase of Air Transat does impact competition, and that’s why it still has to undergo a public interest assessment.

Although the deal has been approved by shareholders of Transat recently, the government has until May 2, 2020, to complete the assessment, which will include an “analysis of the economic benefits or challenges resulting from the proposed transaction.” At a minimum, we could see the deal being delayed until then. At worse, the deal might not go through at all.

Here’s why the deal could be stopped

In the public interest assessment, the federal competition commissioner will be asked for input, and that could weigh heavily on whether the deal goes through. There isn’t a lot of competition within the airline industry in Canada, and a merger between Transat and Air Canada would significantly reduce it even further. While there are discount airlines that have popped up over the years, Transat is one of the bigger airlines in the country.

Competition-related issues have thwarted mergers and acquisitions in the past. The merger between Staples and Office Depot is a good example where the companies saw resistance both in Canada and the U.S. and ultimately the deal fell through. In this case, Air Canada and WestJet will still be the main competitors in the industry, but there could be a big change in how competitive the companies will be.

However, it’s not just large deals that are in question; smaller purchases can be rejected by the government as well. Last year, Corus Entertainment tried to sell French-language channels to BCE for approximately $200 million, and that was rejected by the Commissioner of Competition.

The Air Canada-Transat deal will certainly have a lot more attention and the stakes are also much higher for Canadians. Less competition will likely result in higher prices for travellers, and that could be problematic, especially at a time when economic conditions may be worsening.

Bottom line

Investors shouldn’t consider the deal between the two airlines done just yet, as the government could still stop it in its tracks. Competition in Canada is generally pretty limited in many industries, and the airline industry may be one of the worst. That’s why even though Transat may not be as big a player as WestJet or Air Canada, it could still be enough of a concern that regulators decide it’s not in the best interest of Canadians to go through.

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Fool contributor David Jagielski owns shares of CORUS ENTERTAINMENT INC., CL.B, NV.

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