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Report to the Minister of Transport and the Parties to the Transaction Pursuant to Subsection 53.2(2) of the Canada Transportation Act

Proposed Acquisition by Air Canada of Transat A.T. Inc.

March 27, 2020

Executive summary

Introduction

This report is being provided to the Minister of Transport ("the Minister") further to the Minister's determination that the proposed acquisition by Air Canada of Transat A.T. Inc. ("Transat") (the "Proposed Transaction") (each of Air Canada and Transat will be referred to individually as a "Party" and collectively, as "the Parties") raises issues with respect to the public interest as it relates to national transportation pursuant to subsection 53.1(5) of the Canada Transportation Act ("CTA"). Subsection 53.2(2) of the CTA requires that the Commissioner of Competition ("the Commissioner") report to the Minister and the Parties within 150 days (or within the time specified by the Minister should an extension of time be granted) on any concerns regarding potential prevention or lessening of competition that may occur as a result of the transaction. On August 26, 2019, the Minister granted a 100‑day extension to the Commissioner and Transport Canada for their respective reviews. On March 23, 2020, the Minister granted an additional seven-day extension to the Commissioner.

The Commissioner's views are based upon a forward-looking analysis using data and information collected for the period up to and including February 2020. The Commissioner notes the current environment of disruption due to the COVID‑19 virus pandemic. At the time of writing, the impact of these events on the Canadian airline industry is uncertain but appears to be potentially significant for at least the near term. The ultimate impact of these events may be relevant to the Commissioner's views regarding the likely substantial prevention or lessening of competition related to the Proposed Transaction set out in this report, but it is impossible to know the extent and duration of any impact at this time.

Based upon analysis of facts and information prior to the COVID‑19 pandemic, the Commissioner has determined that the Proposed Transaction is likely to result in substantial anti‑competitive effects through the elimination of rivalry between Air Canada and Transat in the areas of overlap between their networks. In particular, the Proposed Transaction is likely to result in the following if it proceeds in its current contemplated form:

  1. a substantial lessening or prevention of competition in the provision of air passenger services or vacation packages on 83 routes between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America;
  2. a merger of the only two carriers offering non‑stop service on 22 of these 83 routes; and
  3. a significant reduction in travel by Canadians in the overlap markets.

Approach

In assessing the potential competitive effects of a merger, whether under the Competition Act or pursuant to subsection 53.2(2) of the CTA, the Commissioner assesses whether a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially. The Bureau's analytical approach to merger review is set out in its Merger Enforcement Guidelines. The Commissioner assesses the potential competitive effects of a merger transaction by applying the test set out in section 92 of the Competition Act, having regard to the factors identified under section 93 of the Competition Act. The CTA does not contemplate an efficiencies analysis consistent with section 96 of the Competition Act. Accordingly, the Commissioner did not conduct an efficiencies analysis as under section 96 of the Competition Act.

The Bureau's assessment of the Proposed Transaction involved the consideration of a broad range of sources of information, including:

The Bureau also retained four independent experts:

  1. An empirical economic expert, who provided views and analysis regarding the competitive effects likely to result from the Proposed Transaction;
  2. An industry expert, who provided an assessment of the likelihood of entry and expansion in the relevant markets;
  3. A financial expert, who provided analysis of the financial viability of the Transat business; and
  4. An economic expert who provided independent views and analysis regarding the likelihood that the Proposed Transaction would result in a substantial lessening or prevention of competition.

Concerns regarding potential lessening or prevention of competition

Air Canada and Transat operate two of Canada's four largest airlinesFootnote 1 and primary integrated tour operators providing vacation offerings to Canadians. The airline and travel industries play a critical role in the Canadian economy, generating economic growth, creating jobs, and facilitating international trade and tourism. In addition, leisure travel is of particular importance to Canadian consumers, with travel to overseas destinations increasing significantly in the winter months, and Canadians making over 100 million trips annually for holiday, leisure, or recreational purposes.

The Commissioner's analysis identified the following significant competition concerns likely to result from the Proposed Transaction:

  1. The Proposed Transaction will result in Canada's largest air carrier acquiring one of its primary rivals in the provision of leisure travel and vacation packages;
  2. Overall, Air Canada and Transat account for approximately 60% of non‑stop seat capacity from Canada to Europe, with such share increasing further when considering Air Canada's transatlantic joint venture partners, and approximately 45% of non‑stop capacity from Canada to sun destinations;
  3. The Proposed Transaction is likely to result in substantial competitive effects, such as increased prices, less choice, decrease in service, and a significant reduction in travel by Canadians for air passenger services and vacation packages through the elimination of rivalry between Air Canada and Transat in the areas of overlap between their networks. In particular, the Proposed Transaction is likely to result in:
    • a merger of the only two carriers offering non‑stop service on 22 routes between Canada and Europe, Mexico, Central America, the Caribbean, and South America; and
    • a substantial lessening or prevention of competition on 83 total routes, including the 22 noted above, between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America.

The markets where the Proposed Transaction is likely to result in a substantial lessening or prevention of competition in the provision of air passenger services and/or vacation packages for transatlantic and sun destinations are set out in Tables 1 and 2 below.

Table 1A: Transatlantic markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition—Non‑stop Overlaps
Origin Destination Annual Non‑Stop and One‑Stop Passengers Parties' combined market share
Non‑stop service
Parties' combined market share
Non‑stop and one-stop service
Summer WinterFootnote 2 Summer WinterFootnote 3
Montreal Barcelona 100,388 100% 100% >90% >40%
Montreal Brussels 102,745 100% n/a >90% >80%
Montreal Lisbon 86, 505 100% n/a >90% >80%
Montreal Lyon 133,239 100% 100% >90% >80%
Montreal Marseille 93,826 100% 100% >90% >40%
Montreal Rome 135,884 100% 100% >90% >70%
Montreal Venice 57,565 100% n/a >90% n/a
Toronto Manchester 138,689 100% n/a >90% >70%
Toronto Venice 77,996 100% n/a >90% n/a
Toronto Zagreb 44,371 100% n/a >90% n/a
Montreal Nice 57,479 100% n/a >80% n/a
Montreal Toulouse 64,286 n/aFootnote 4 n/a >80% >30%
Montreal Bordeaux 54,796 100% n/a >80% >10%
Montreal Athens 93,104 >90% n/a >90% n/a
Toronto Athens 114,560 >90% n/a >90% n/a
Toronto Glasgow 96,144 >90% n/a >80% >70%
Toronto Porto 70,999 >90% n/a >80% >70%
Toronto Barcelona 145,846 >80% n/a >80% >60%
Toronto Rome 243,452 >80% n/a >70% >70%
Montreal London 182,136 >70% n/a >70% >70%
Toronto London 847,164 >70% >70% >70% >70%
Toronto Paris 285,063 >70% n/a >70% >60%
Toronto Lisbon 182,954 >60% >50% >60% >50%
Vancouver London 421,531 >60% n/a >60% >50%
Toronto Amsterdam 232,542 >60% n/a >50% n/a
Toronto Dublin 203,552 >60% n/a >50% n/a
Montreal Paris 844,375 >50% >70% >50% >70%
Table 1B: Transatlantic markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition—Non‑Stop/One‑Stop or One‑stop/One‑stop Overlaps
Origin Destination Annual Passengers Parties' combined market share
Non‑stop and one-stop service
Summer Winter
Quebec City Lyon 7,706 100% 100%
Quebec City Brussels 5,474 100% 100%
Quebec City Marseille 3,924 100% 100%
Quebec City Nice 2,189 100% n/a
Quebec City Barcelona 6,023 >90% 100%
Quebec City Paris 73,204 >90% >90%
Quebec City Rome 4,315 >90% n/a
Quebec City Lisbon 3,704 >90% n/a
Quebec City Venice 2,907 >90% n/a
Quebec City Madrid 1,638 >90% n/a
Quebec City Prague 1,162 >90% n/a
Toronto Madrid 66,474 >80% n/a
Toronto Prague 40,548 >80% n/a
Montreal Madrid 39,454 >80% n/a
Montreal Prague 27,827 >80% n/a
Montreal Dublin 32,372 >80% n/a
Montreal Zagreb 12,684 >80% n/a
Toronto Lyon 17,674 >70% >50%
Toronto Marseille 14,907 >70% >40%
Vancouver Rome 31,115 >70% n/a
Vancouver Venice 13,060 >70% n/a
Vancouver Barcelona 28,871 >60% n/a
Table 2: Sun markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition
Origin Destination Annual Non‑Stop Passengers Parties' combined market share
Non‑stop service
SummerFootnote 5 Winter
Montreal Samana 48,938 100% 100%
Montreal San Jose 34,190 n/a 100%
Toronto Cartagena 8,767 n/a 100%
Montreal Fort Lauderdale 425,718 >90% >90%
Montreal Puerto Vallarta 78,190 >90% >90%
Toronto Samana 38,359 >60% >80%
Montreal Cozumel 24,604 100% >70%
Montreal Punta Cana 408,480 >70% >70%
Toronto Fort Lauderdale 454,867 >70% >70%
Montreal Puerto Plata 109,583 >60% >70%
Montreal Liberia 25,100 n/a >70%
Toronto San Jose 66,731 n/a >70%
Quebec City Punta Cana 48,308 n/a n/aFootnote 6
Quebec City Cancun 70, 611 n/a n/aFootnote 7
Toronto Orlando 552,652 >60% >60%
Montreal Cancun 506,808 >50% >60%
Montreal Varadero 241,776 >50% >60%
Montreal Holguin 113,041 >40% >60%
Montreal Montego Bay 89,963 >40% >60%
Toronto Puerto Vallarta 115,308 >40% >60%
Montreal Pointe-à-Pitre 59,635 100% >50%
Montreal Fort-de-France 55,022 100% >50%
Montreal Cayo Coco 162,747 >50% >50%
Montreal Santa Clara 172,915 >50% >50%
Toronto Punta Cana 566,851 >50% >50%
Vancouver Puerto Vallarta 145,801 >50% >50%
Toronto Cancun 783,971 >40% >50%
Toronto Holguin 122,603 >40% >50%
Halifax Cancun 32,026 >60% >40%
Halifax Orlando 55,563 >40% >40%
Toronto Cayo Coco 186,739 >40% >40%
Toronto Puerto Plata 152,518 >40% >40%
Toronto Santa Clara 173,121 >30% >40%
Toronto Varadero 323,680 >30% >40%

On each of these routes, the Bureau did not find that entry or expansion by competitors would likely constrain an exercise of market power by the combined Air Canada/Transat post-transaction. The Bureau concluded that barriers to entry or expansion in the relevant markets are generally high, and that no single carrier or combination of competitors is poised to replace Transat's presence in the markets of concern or its offerings to Canadian travelers.

In particular, potential entrants face challenges related to the availability of slots and infrastructure at airports in Canada and in Europe, including at key airports such as Toronto Pearson, Montreal Trudeau, Vancouver International Airport, Amsterdam Schipol, London Heathrow, London Gatwick, Dublin Airport, Paris Orly, and Lisbon Portela Airport. Foreign-based airlines may also face significant costs and obstacles in attracting Canadian customers and establishing a reputation and distribution presence in Canada. The merged entity would hold a majority position at airports in Eastern Canada, including Montreal Trudeau and Toronto Pearson, and may receive preferential allocation of infrastructure and other operational advantages as compared to potential entrants. Finally, on a number of transatlantic routes, obtaining access to feed traffic is also a factor in efficient entry, and for certain sun destinations, securing competitive hotel offerings would likely represent a barrier to entry.

The Bureau's empirical economic expert found that the Proposed Transaction was likely to result in significant competitive effects, including price increases for Canadians and decreases in travel by Canadians on a variety of routes where the merged entity would have market power.

The Bureau did not find that failure of the Transat business was probable or likely to impact the Commissioner's conclusions, based on the assessment of a financial expert. The expert's views were based upon data and information collected for the period up to and including February 2020, prior to the onset of the current environment of disruption due to the COVID‑19 virus pandemic.

As a result, the Commissioner has concluded that the Proposed Transaction is likely to result in a substantial lessening or prevention of competition in the provision of air passenger services and vacation packages on a variety of routes between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America, and represents a merger of the only two carriers offering non-stop service on 22 of these routes.

The Parties have indicated a willingness to work with the Commissioner to try to resolve the competition concerns and may propose certain measures they are prepared to undertake to address these concerns pursuant to subsection 53.2(5) of the CTA. In addition to providing his report, the Commissioner will engage with the Parties regarding undertakings offered and shall provide the Minister with his assessment of the adequacy of any such undertakings to address competition concerns, pursuant to subsection 53.2(6) of the CTA.


Table of contents

1. Introduction

This report outlines the Commissioner's concerns relating to a potential lessening or prevention of competition resulting from the proposed acquisition by Air Canada of Transat A.T. Inc. ("Transat") (the "Proposed Transaction"), as contemplated by subsection 53.2(2) of the CTA (in this report, each of Air Canada and Transat A.T. Inc. will be referred to individually as a "Party" and collectively, as "the Parties"). This report represents the second time the Commissioner has been called on by the Minister in the context of a public interest assessment under the Canada Transportation Act ("CTA"), and is being delivered to the Minster as required by the CTA. In February 2019, the Commissioner also provided a report to the Minister pursuant to subsection 53.2(2) of the CTA outlining significant competition concerns regarding the proposed merger of Bradley Air Services Limited and Canadian North Inc.Footnote 8

The Competition Bureau (the "Bureau") is an independent law enforcement agency that is responsible for, among other things, the administration and enforcement of the Competition Act. The Bureau's mandate is to ensure that Canadian businesses and consumers prosper in a competitive and innovative marketplace. The Bureau recognizes that the airline and travel industries play a critical role in the Canadian economy, generating economic growth, creating jobs, and facilitating international trade and tourism. The Bureau also notes that leisure travel is of particular importance to Canadian consumers, with travel to overseas destinations increasing significantly in the winter months, and Canadians making over 100 million trips annually for holiday, leisure, or recreational purposes.Footnote 9

Air Canada and Transat operate two of Canada's four largest airlinesFootnote 10 and primary integrated tour operators providing vacation offerings to Canadians. In addition, Transat's travel agency division, Transat Distribution Canada, operates one of the largest retail travel agency networks in Canada with 358 locations across the country. As a result, the Bureau's assessment of the Proposed Transaction was very complex, and included the consideration of a broad range of sources of information, including:

The Commissioner has determined that the Proposed Transaction is likely to result in substantial competitive effects through the elimination of rivalry between Air Canada and Transat in the areas of overlap between their networks. In particular, the Proposed Transaction is likely to result in a substantial lessening or prevention of competition in the provision of air passenger services or vacation packages on 83 routes between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America, and represents a merger of the only two carriers offering non‑stop service on 22 of these routes. The Bureau found that the Proposed Transaction would likely result in a significant reduction of travel by Canadians in the overlap markets.

The Bureau has considerable experience and expertise assessing competition considerations in the airline and travel sectors and has pursued enforcement cases before the Competition Tribunal and the Courts relating to air services under the Competition Act to safeguard competition in these pivotal industries. These include applications under the abuse of dominance provisions (sections 78 and 79), merger provisions (section 92), competitor collaboration provision (section 90.1), and provisions that prohibit cartels (section 45). A summary of key Bureau reviews in the airline sector is provided in Appendix A.

In assessing the impacts of a merger to determine if it is likely to result in a substantial prevention or lessening of competition, the Bureau assesses the likely effects of the merger on price, output, and other dimensions of competition, such as quality, product choice, and service, in accordance with its Merger Enforcement GuidelinesFootnote 11, as informed by jurisprudence from the Competition Tribunal and the Courts and accepted approaches in economic theory and practice related to the review of merger transactions.

The Commissioner's views are based upon a forward-looking analysis using data and information collected for the period up to and including February 2020. The Commissioner notes the current environment of disruption due to the COVID‑19 virus pandemic. At the time of writing, the impact of these events on the Canadian airline industry is uncertain but appears to be potentially significant for at least the near term. The ultimate impact of these events may be relevant to the Commissioner's views regarding the likely substantial prevention or lessening of competition related to the Proposed Transaction set out in this report but it is impossible to know the extent and duration of any impact at this time.

Based upon analysis of facts and information collected prior to the COVID‑19 pandemic, as is discussed in detail below, the Commissioner's views are the following:

  1. The Proposed Transaction will result in Canada's largest air carrier acquiring one of its primary rivals in the provision of leisure travel and vacation packages;
  2. Overall, Air Canada and Transat account for approximately 60% of non‑stop seat capacity from Canada to Europe, with such share increasing further when considering Air Canada's transatlantic joint venture partners, and approximately 45% of non‑stop capacity from Canada to sun destinations;Footnote 12
  3. The Proposed Transaction is likely to result in substantial competitive effects, such as increased prices, less choice, decrease in service, and a significant reduction in travel by Canadians for air passenger services and vacation packages through the elimination of rivalry between Air Canada and Transat in the areas of overlap between their networks, including by:
    • resulting in a merger of the only two carriers offering non-stop service on 22 routes between Canada and Europe, Mexico, Central America, the Caribbean, and South America; and
    • lessening or preventing competition for the provision of air passenger services and vacation packages on 83 total routes between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America.

The following sections describe the Bureau's analytical framework, provide background information on the relevant air passenger services and vacation packages markets, and summarize the Commissioner's analysis of concerns regarding competition and the Proposed Transaction.

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2. LegislationFootnote 13

Under the Competition Act, the Commissioner has jurisdiction to review merger transactions of any size and in any industry to determine whether they have, or are likely to have, the effect of preventing or lessening competition substantially. During the past three fiscal years, the Commissioner has conducted a review of an average of 214 transactions per year across all industries in Canada. Pursuant to Part IX of the Competition Act, parties to proposed transactions that exceed certain statutory and regulatory thresholds (and are not subject to any exemptions) are required to notify the Bureau and provide prescribed information prior to completing their transaction. After analysing a proposed transaction, the Commissioner may:

  1. Decline to apply to the Competition Tribunal in respect of the proposed transaction;
  2. Apply to the Competition Tribunal seeking an order to prohibit all or part of a merger or a remedy to address the competition concerns arising from the merger; or
  3. Enter into a consensual resolution with the parties to address competition concerns that is registered with the Competition Tribunal and has the force of a Competition Tribunal order.

The CTA requires the Commissioner to report to the Minister and the parties to the transaction on any concerns regarding potential prevention or lessening of competition. The Commissioner assesses the potential competitive effects of a merger transaction by applying the test set out in section 92 of the Competition Act, having regard to the factors identified under section 93 of the Competition Act.

In reporting to the Minister and the parties on concerns regarding potential prevention or lessening of competition pursuant to subsection 53.2(2) of the CTA, the Bureau has not conducted an efficiencies assessment consistent with section 96 of the Competition Act, as the CTA does not contemplate such an assessment.Footnote 14

Under section 92 of the Competition Act, the Bureau assesses whether a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially. A substantial prevention or lessening of competition results only from mergers that are likely to create, maintain, or enhance the ability of the merged entity, unilaterally or in coordination with other firms, to exercise market power. Section 93 includes an assessment of acceptable product substitutes, barriers to entry, effective remaining competition, or any other factor that is relevant to competition in a market. The Bureau's analytical approach to merger review, including its assessment of the section 93 factors, is set out in its Merger Enforcement Guidelines and informed by jurisprudence from the Competition Tribunal and the Courts and may include the following considerations:

  1. Market definition, including definition of both the relevant product and geographic markets. The Bureau defines markets in order to identify the set of products that customers consider to be substitutes for those offered by the merging parties, and the set or sets of buyers that could potentially face increased market power owing to the merger;
  2. Calculation of market shares and concentration in the relevant markets. The Commissioner generally is not concerned about the unilateral exercise of market power when the post-merger market share of a merged firm would be less than 35 percent;
  3. Analysis of anti‑competitive effects based on quantitative techniques and evaluation of various factors including: the effectiveness of remaining competitors, countervailing power held by buyers, whether the business of a party to the proposed merger (or a part thereof) is likely to fail, and the likelihood that the transaction will result in the removal of a vigorous and effective competitor; and
  4. Analysis of barriers to entry and of the likelihood that timely entry by potential competitors would occur on a sufficient scale and with sufficient scope to constrain a material price increase (or other exercise of market power) in the relevant market.

Where a proposed transaction involving a transportation undertaking is subject to mandatory pre-merger notification under the Competition Act, the Minister must also be notified under the CTA.Footnote 15 If the Minister is of the opinion that the proposed transaction raises issues with respect to the public interest as it relates to national transportation the Minister may direct the Canadian Transportation Agency or another person to examine those issues. Further, subsection 53.2(2) of the CTA requires the Commissioner to report to the Minister and the parties to the transaction on any concerns regarding potential prevention or lessening of competition that may occur as a result of the transaction, within 150 days after the Commissioner is notified of the proposed transaction under the Competition Act. However, pursuant to subsection 53.2(6), the Minister has the authority to grant an extension should extra time be necessary.

After receipt of the Commissioner's report, the merging parties may propose measures they are prepared to undertake to address the Commissioner's concerns, if any, and the Commissioner shall provide an assessment of the adequacy of those measures to the Minister. The parties must also confer with the Minister on any measures they are prepared to take to address public interest concerns relating to national transportation.

On the recommendation of the Minister, if the Governor in Council is satisfied that it is in the public interest to approve the proposed transaction, taking into account any revisions to it proposed by the parties and any measures they are prepared to undertake, the Governor in Council may approve the transaction and specify any terms and conditions that it considers appropriate. The Governor in Council shall indicate those terms and conditions that relate to potential prevention or lessening of competition and those that relate to the public interest as it relates to national transportation.

Where a transaction has been approved under subsection 53.2(7) of the CTA, the Competition Tribunal cannot make an order under section 92 of the Competition Act in respect of that transaction.

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3. Sources of information on which this report is based

The Bureau's assessment of the Proposed Transaction included review of the following:

The Bureau also retained four independent experts:

  1. An empirical economic expert, who provided views and analysis regarding the competitive effects likely to result from the Proposed Transaction;
  2. An industry expert, who provided an assessment of the likelihood of entry and expansion in the relevant markets;
  3. A financial expert, who provided analysis of the financial viability of the Transat business; and
  4. An economic expert who provided independent views and analysis regarding the likelihood that the Proposed Transaction would result in a substantial lessening or prevention of competition.

Information obtained by or provided to the Bureau in the course of its review is protected by section 29 of the Competition Act. The Bureau has the discretion to communicate such information only in limited circumstances as provided in section 29 and, even when permitted, minimizes the extent to which confidential information is communicated. The Bureau recognizes that maintaining the confidentiality of information is essential to its ability to pursue its responsibilities and to its integrity as a law enforcement agency.

3.1 Expert analysis

3.1.1 Anti‑competitive Effects

The empirical economic expert retained by the Bureau conducted an empirical analysis of the Parties' ticket and vacation package data in order to quantify the likely anti‑competitive effects of the Proposed Transaction. The analysis included an estimation of price and quantity effects for each of airline tickets and vacation packages in the relevant overlapping markets in which both Parties operate.

Data analyzed by the Bureau's empirical economic expert included flight, ticketing, and vacation package data, including transaction-level information on pricing, revenues, and product characteristics for both airline tickets and vacation packages. The expert's analysis considered millions of lines of detailed transaction data collected from the Parties to the transaction, as well as directly from competitors. Based on this information, the expert conducted a merger simulation analysis, which included specifying a model of competition among airlines and tour operators in the relevant overlapping areas, estimating key parameters of customer demand, and simulating the price and quantity effects of the Proposed Transaction. In addition, the expert conducted a hypothetical monopolist test across the overlapping areas to identify the relevant markets for the purposes of the Bureau's analysis, the results of which are discussed in section 7.1 of this report.

The expert concluded that the Proposed Transaction would result in significant competitive effects, and material price increases in a large number of the overlapping markets. The results of the empirical economic expert's analysis are described in section 7.3 of this report.

3.1.2 Industry expert

The Bureau retained an industry expert with significant experience in airline network planning and business development. The expert assessed entry considerations in Canada and at destinations served by both Air Canada and Transat, including, but not limited to, those related to airport capacity, hotel access, and distribution requirements. The expert also considered prevailing market dynamics and the fleets and capabilities of potential entrants for the relevant routes. In conducting this assessment, the expert was provided with internal strategic and business documents collected from the Parties and competitors, submissions provided by the Parties and other stakeholders, and other documents and data. Based on this analysis, the expert provided an assessment of the likelihood of timely entry or expansion by competitors in the relevant overlap markets, in the case of a material post-transaction price increase (or other exercise of market power).

The industry expert concluded that timely entry was not likely in the majority of the overlap markets post-transaction. The results of this analysis are set out below in section 7.4 of this report.

3.1.3 Financial analysis

The financial expert engaged by the Bureau conducted an analysis of Transat's network through a review of financial statements, strategic documents, and other information. The financial expert reported on key financial metrics, and provided views on the financial viability of Transat's operations. The expert's views informed the Bureau's analysis of whether Transat would be likely to remain a vigorous and effective competitor in the overlap markets in the absence of the Proposed Transaction, which is described below in section 7.2 of this report.

The expert's analysis included sensitivity analyses with respect to key aspects of Transat's plans for improved profitability, including the returns on Transat's hotel investments and expected cost-reduction and margin-improvement initiatives. The financial expert concluded that Transat is solvent and unlikely to exit the relevant markets in the near term.

The expert's views were based upon data and information collected for the period up to and including February 2020, prior to the onset of the current environment of disruption due to the COVID‑19 virus pandemic. At the time of writing, the impact of these events on the Canadian airline industry is uncertain but appears to be potentially significant for at least the near term. It is impossible to know the extent and duration of any impact on Transat at this time.

3.1.4 Economic expert

Considering the scope and complexity of the Proposed Transaction, the Bureau retained an economic expert with substantial expertise in assessing the anticompetitive effects of mergers to provide additional analysis of the effects of the Proposed Transaction. The economic expert provided an assessment of the likelihood that the Proposed Transaction would result in a substantial lessening or prevention of competition in the overlap markets based on review of third party data, internal strategic and planning documents provided by the Parties, and the analysis provided by the Bureau's experts described above.

The expert found that the Proposed Transaction is likely to result in a substantial lessening or prevention of competition in respect of vacation packages and air travel on many origin-destination pairs to sun destinations and to Europe.

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4. Parties to the proposed transaction

Air Canada is the largest provider of scheduled passenger service in Canada, with headquarters in Montreal and hubs in Toronto, Montreal, and Vancouver. In 2018, Air Canada, together with its contracted regional carriers, carried approximately 50.9 million passengers and operated close to 400 aircraft to over 220 direct destinations. Air Canada is a founding member of the Star Alliance network, which allows its 26 members to share traffic, lounges, frequent flyer programs, and other services worldwide. Air Canada also participates in a transatlantic joint venture ("A++") with United Airlines ("United") and Deutsche Lufthansa AG ("Lufthansa", including its subsidiaries Brussels Airlines, Austrian Airlines, Swiss International and Eurowings), which allows for coordination of capacity planning, pricing, and revenue management on transatlantic routes.

In addition to its mainline operations to domestic, international and transborder destinations, Air Canada offers service through Air Canada Rouge, its lower-cost airline deployed to leisure destinations, and Air Canada Express, a domestic and transborder-focused network in which regional airlines operate flights on behalf of Air Canada.

Air Canada also develops, markets, and distributes vacation packages through its tour operator business, Air Canada Vacations ("ACV"). ACV packages airline tickets with hotels, cruises, and other holiday services. ACV offers packages to 200 destinations worldwide including sun destinations and leisure destinations in Europe, the South Pacific, Asia, and Australia.

Transat is an airline and vertically integrated travel company headquartered in Montreal, with principal bases in Montreal, Toronto, and Vancouver. Transat offers both air passenger service and vacation packages, primarily to destinations in the Caribbean and Mexico in the winter and Europe in the summer. In 2018, Air Transat carried approximately 5 million passengers and operated 34 aircraft serving flights to 34 direct sun destinations and 27 direct European destinations. Transat's tour operator business offers vacation packages containing components such as flights, accommodations, cruises, and guided tours to European and sun destinations.

Transat is also active in the distribution of travel products and has plans to develop a hotel division focusing on Mexican and Caribbean markets. Transat's travel agency division, Transat Distribution Canada, operates one of Canada's largest networks of retail travel agencies with 358 locations across the country. Transat's agencies operate under a variety of banners including Club Voyages, Marlin Travel/Voyages Marlin, Voyages en Liberté, Transat Travel/Voyages Transat, and TravelPlus, and sell both Transat and third party vacation products.

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5. The proposed transaction

On June 27, 2019, Air Canada and Transat announced that they had concluded a definitive Arrangement Agreement that provided for Air Canada's acquisition of all issued and outstanding shares of Transat and its combination with Air Canada (the "Proposed Transaction"). On August 11, 2019, it was announced that the Arrangement Agreement had been amended to increase the consideration to a total value of approximately $720 million.

The Parties submit that the Proposed Transaction will generate significant synergies and consumer benefits, including access to new destinations, increased and improved frequencies, and a more effective Canadian competitor in the global travel landscape. When reporting to the Minister pursuant to subsection 53.2(2) of the CTA, the Bureau's analysis is limited to concerns regarding competition, and it does not conduct an assessment of other public interest factors.

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6. Background: Leisure travel in Canada

The Proposed Transaction would combine two of Canada's four largest airlines and primary integrated tour operators providing vacation offerings to Canadians. The Air Canada and Transat networks generally overlap with respect to the sale of air travel and vacation packages to travellers in three regions:

  1. On routes between Canadian cities and European destinations ("transatlantic routes");
  2. On routes between Canadian cities and destinations in the Caribbean, Florida, Central America, certain Southern American cities, and Mexico ("sun routes"); and
  3. On certain domestic routes in Canada.

Both Air Canada and Transat are active at multiple levels of the travel supply chain in Canada, which broadly includes the following:

The Bureau considered the vertically-integrated nature of the Parties' businesses in its review, and reviewed evidence and information concerning the Parties' relationships with intermediaries and suppliers at each level of the supply chain.

6.1 Network overlap

As Canada's largest airline, Air Canada offers an extensive domestic and international network with flights originating in approximately 60 cities in Canada. Air Canada's network includes flights to approximately 50 sun destinations, many of which are operated by Air Canada Rouge. Air Canada also offers flights from Canada to over 30 European destinations, including through its joint-venture partners. Air Canada's primary hubs for its operations are in Montreal, Toronto and Vancouver.

Transat, for its part, operates a highly seasonal network, with winter service in 2018 including 33 sun destinations and 8 transatlantic destinations, and summer service including 16 sun destinations and 26 transatlantic destinations. Transat's primary base of operations is in Montreal and its revenues are strongly focused in Eastern Canada; Transat historically generates as much as 80% of its passenger traffic in Quebec and Ontario. Transat operates a limited domestic network linking Montreal, Calgary, Toronto, Vancouver, and Quebec City, which allows it to provide connecting services from across Canada (particularly for service to European destinations).

The Parties primarily overlap with respect to air services for leisure passengers on sun routes, transatlantic routes, and certain domestic routes.

6.1.1 Sun routes

Travel to sun destinations is of significant importance to Canadian vacationers. In 2019, over 10 million seats were offered between Canadian airports and sun destinations including Florida, Mexico, Central America and the Caribbean. Around 85% of these seats were bound for the five most popular destination areas: Florida, Mexico, Cuba, the Dominican Republic and Jamaica. Demand for travel to sun destinations from Canada has grown significantly—seat capacity between Canada and sun destinations has more than doubled since 2010, from approximately 4.5 million to 10 million total seats. Travel to the region from Canada is seasonal, with over 60% of seats offered in the winter months.

Travel to sun destinations by Canadians is largely driven by purchases of vacation packages. Data available to the Bureau indicates that approximately 65% of passenger trips on the sun routes served by both Air Canada and Transat involve purchases of flights and accommodations from a tour operator. In addition to traditional package vacation destinations, the Parties offer service to a number of destinations with higher proportions of air-only purchases from Canada, including San Jose, Fort-de-France, Pointe-à-Pitre, and St Maarten.

Capacity to sun destinations is dominated by four major integrated airline and tour operators (Air Canada, Transat, WestJet and Sunwing) who together account for over 90% of seats offered to Canadians. The Parties represent approximately 45% of total non‑stop capacity to the region from Canada in winter months.

Table 3 below summarizes the sun routes on which both Air Canada and Transat provide direct service in peak season, and offer vacation packages or airline tickets to Canadians.

Table 3: Transat and Air Canada Networks in the Sun Overlap Areas (Weekly Frequencies)Footnote 16
  Toronto Montréal Vancouver Calgary Winnipeg Ottawa Québec
  AC TS AC TS AC TS AC TS AC TS AC TS AC TS
Cancun 14 11 14 8 3 3 2 3 3 3 5 2 1 4
Cartagena 3 1                        
Cayo Coco 4 4 3 4                    
Cozumel 3 1 1 1                    
Fort-de-France     3 2                    
Fort Lauderdale 21 5 23 7                    
Holguin 2 3 1 5                    
Huatulco 2 1                        
Liberia 7 2 2 2                    
Montego Bay 7 4 2 4                    
Orlando 24 3 14 3                    
Pointe-à-Pitre     4 2                    
Puerto Plata 3 5 3 5                    
Puerto Vallarta 7 2 3 3 4 4 2 4            
Punta Cana 7 11 7 8             3 3 1 4
Samana 2 1 2 3                    
San Jose 7 2 4 2                    
San Juan (PR) 2 1 2 1                    
Santa Clara 2 3 3 3                    
St Maarten 1 1                        
Varadero 6 6 5 5             1 1    

6.1.2 Transatlantic routes

Approximately 8.6 million seats were offered between Canada and Europe in 2019. The five most popular destination countries, namely the United Kingdom, France, Germany, the Netherlands, and Italy, account for 70% of all capacity. The Canada-Europe market has seen a growth of approximately 50% in seat capacity between Canada and all European destinations from 2010 to 2019. Transatlantic leisure travel is focused on the summer season, with around 75% of annual seat capacity offered in the summer.

The Bureau found that transatlantic travelers are much less likely to purchase vacation packages, with over 90% of the Parties' sales in the overlap areas consisting of air tickets without included accommodations based on data available to the Bureau.

The largest operators of airline capacity between Canada and European destinations are the Parties (including certain of Air Canada's A++ partners), followed by major network carriers that participate in Star Alliance's competing airline alliances, Oneworld and SkyTeam (namely Air France–KLM and British Airways). Growing numbers of seats are also offered by WestJet and unaligned or low-cost carriers such as Level and Aer Lingus. A summary of the largest airlines operating transatlantic routes from Canada to Europe is provided in Table 4 below.

Table 4: Carriers Operating on Routes Between Canada and Europe
Airline Capacity ShareFootnote 17
Air Canada (A++) 43%
Air Transat A.T. Inc. 15%
Air France-KLM 12%
Lufthansa German Airlines (A++) 6%
British Airways (IAG) 5%
Westjet 4%
Icelandair 2%
Turkish Airlines 2%
LOT - Polish Airlines 1%
Condor Flugdienst 1%
Aer Lingus (IAG) 1%
SWISS (A++) 1%
TAP Air Portugal 1%
Austrian Airlines (A++) 1%
Corsair 1%
Brussels Airlines (A++) 1%
SATA Azores 1%
Alitalia 1%
Ukraine International Airlines 1%
Others ~2%

Air Canada (along with its A++ partners) and Transat offer in excess of 60% of non‑stop seat capacity between Canada and Europe. Table 5 summarizes the routes on which both Air Canada and Transat offer non‑stop service, and provide air tickets or vacation packages to Canadians.

Table 5: Transat and Air Canada Networks in the Transatlantic Overlap Areas (Weekly Frequencies)Footnote 18
  Toronto Montréal Vancouver Calgary
  AC TS AC TS AC TS AC TS
Amsterdam 7 4            
Athens 9 4 9 4        
Barcelona 7 3 7 5        
Bordeaux     2 4        
Brussels     7 3        
Dublin 7 5            
Glasgow 3 5            
Lisbon 5 4 3 5        
London 28 9 7 3 14 7 7 3Footnote 19
Lyon     5 5        
Manchester 5 5            
Marseille     3 5        
Nice     4 3        
Paris 7 5 14 14 4 3Footnote 20  
Porto 3 3            
Rome 7 7 7 6        
Toulouse     XFootnote 21 4        
Venice 7 2 3 3        
Zagreb 4 3            

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7. Competitive analysis

7.1 Relevant markets

The Bureau defines markets in order to identify the set of products that customers consider to be close substitutes for those offered by the merging parties. Defining markets allows the Bureau to identify participants in a relevant market to determine market shares and concentration levels. Where the Bureau finds that a merger may raise competition concerns, it will typically identify one or more relevant markets in which competition is likely to be prevented or lessened. In the present review, the Bureau considered that the relevant markets were the provision of each of air passenger services and vacation packages on origin-destination pairs operated by the Parties. The Bureau also assessed whether the inclusion of connecting itineraries, or consideration of geographic markets broader than origin-destination pairs would impact its conclusions.

For the purposes of this analysis, a relevant market is defined as the smallest group of products, including at least one product of the merging parties, and the smallest geographic area, in which a sole profit-maximizing seller (a "hypothetical monopolist") would impose and sustain a small but significant and non-transitory increase in price. In most cases, the Bureau considers a five percent price increase to be significant and a one-year period to be non-transitory. Identifying the smallest set of products in which a hypothetical monopolist would impose and sustain such a price increase, without buyers switching their purchases to other products in sufficient quantity to render the price increase unprofitable, is often referred to as the "hypothetical monopolist test." The hypothetical monopolist test may be conducted empirically where the data allows. The Bureau may also consider other evidence relevant to defining markets, including information on the views, strategies, and behaviour of buyers and documents prepared by the merging parties in the ordinary course of business.

Air Canada and Transat are Canadian-based carriers and tour operators with networks that overlap in three broad regions:

  1. transatlantic routes,
  2. sun routes, and
  3. domestic routes.

In the overlap areas, the Parties offer two primary products to Canadians:

  1. air passenger service and
  2. vacation packages.

The Bureau has typically defined relevant geographic markets in transportation industries according to origin-destination pairs, and considered different modes of transportation to belong to separate product markets. The Bureau's analysis focused on five aspects of market definition relevant to its assessment of the Proposed Transaction:

  1. Differentiation of air travel for leisure and business passengers;
  2. Substitutability among airports in a given city;
  3. Substitutability among destinations;
  4. Substitutability between non‑stop and one-stop flights; and
  5. Substitutability between vacation packages and independently-booked vacations.

In defining the relevant markets, the Bureau reviewed a wide variety of information including analyses of sales data, survey data on consumer preferences, internal strategic and business documents produced by the Parties and competitors, and interviews with market participants. The Bureau also considered assessments of the relevant markets provided by external economic experts, including an empirical assessment of the hypothetical monopolist test conducted by the Bureau's empirical economic expert.

7.1.1 Services for leisure and business passengers

Air Canada is a network airline operating both:

  1. a full-service mainline business offering products targeted at business and leisure passengers, and
  2. a low-cost subsidiary (Air Canada Rouge) targeting primarily leisure customers.

Transat, for its part, is focused on travel products for leisure customers. As a result, the Bureau considered whether it was appropriate to assess air travel for leisure and business passengers as separate relevant markets.

The Bureau found that leisure and business passengers generally exhibit different demand characteristics. Both stakeholders and the Parties' internal documents indicated that leisure passengers are less time-sensitive, less destination-sensitive, more price-sensitive, and book travel further in advance than their business counterparts, while business passengers value frequent service, flexible bookings, and premium offerings (e.g. lounge access). The Bureau's review of the Parties' strategic documents, pricing approaches, and revenue management strategies further supported that these different demand profiles are targeted through distinct fare classes, cabin products, ancillary products and services, and other offerings, which are generally not substitutable. For example, documentary evidence showed that there were often significant price differentials between business class fares, premium economy and economy fares; and that the Parties adopted separate competitive strategies, including benchmarking different competitors, for different fare class products.

As a result, the Bureau concluded that air passenger service for leisure and business passengers likely constitute separate markets, and the Bureau focused its analysis on the provision of air passenger service for leisure passengers. In general, the Bureau assessed competitive dynamics for products purchased by leisure passengers, and the Bureau's experts assessed competitive effects separately for economy fare classes and vacation packages.

7.1.2 Airport substitution

In cities where there is more than one airport and both Air Canada and Transat offer service, the Bureau reviewed evidence regarding substitutability between services at different airports. The Bureau focused its analysis on potential airport substitution in the following cities where the parties overlap and flights to/from Canada are available at multiple airports: Tampa, United States (TPA, PIE); London, United Kingdom (LGW, LHR), Paris, France (CDG, ORY) and Toronto, Canada (YYZ, YTZ). London is the only city in the relevant markets where the Parties do not overlap on an airport basis, with Air Canada operating out of London-Heathrow and Transat operating out of London-Gatwick; as a result, in other markets, the Bureau considered airport substitution in order to confirm whether competing airlines would constrain the Parties post-transaction.

The Bureau considered factors such as an airport's catchment area, the distance between each airport and the city center, itineraries offered to/from each airport, and stakeholder views regarding the extent to which airports compete for passengers. The Bureau also reviewed the Parties' strategic documents and pricing strategies in order to evaluate the competitive constraint offered by services at alternative airports. The Bureau found that leisure travelers are generally less time-sensitive than business travelers, and therefore, in the majority of the relevant markets, alternate airports serving the same city were likely to be part of the same relevant market.

The Bureau also considered whether, with respect to leisure travelers, US border airports are close substitutes for Canadian airports. Evidence suggested that a large price differential between a Canadian airport and a US airport would be required for sufficient numbers of Canadian leisure travelers to incur the time penalty and transportation costs associated with departing from or arriving at a US border airport. The Bureau reviewed the Parties' strategic and planning documents, as well as information collected from stakeholders, and generally did not find evidence of close competition between the Parties' services and those offered from US border airports. Therefore, the Bureau concluded that services from US border airports were unlikely to be in the same market as services from Canadian airports on the overlap routes.

7.1.3 Destination substitution

The Bureau has typically defined relevant geographic markets in transportation industries according to origin-destination pairs, as service to an alternative origin-destination pair has generally not been considered an adequate substitute. In the present case, the Bureau sought to confirm whether leisure travelers (who are generally less destination-sensitive than business travelers) purchasing airline tickets or vacation packages may substitute between destination cities in response to a price increase, such that different destination cities may be in the same relevant market.

7.1.3.1 Sun destinations

The Bureau found that Canadians purchasing vacation packages to sun destinations are more willing to substitute between destinations based on relative prices because their priority, particularly in the winter, is to experience a warm climate.

The Bureau assessed information relating to customer behaviour, including survey results and stakeholder views. In support of their view that customers engage in significant destination substitution, and that the relevant markets include all sun destinations, the Parties submitted the results of a survey of Canadian travelers commissioned from a major market research firm. The survey, which was conducted without Bureau input, presented certain methodological issues which were taken into account in the Bureau's assessment, and did not provide conclusive evidence of specific demand responses to price increases in a given market.Footnote 22 Nonetheless, the survey results suggested that a significant proportion of recent travelers considered multiple sun destinations when booking vacation travel, and that certain passengers switch destinations in response to significant price increases on a route. This directional information was considered within the broader context of the overall evidence collected by the Bureau during its assessment.

The Bureau conducted extensive interviews with stakeholders in order to further investigate customer responses to pricing among sun destinations. Stakeholders indicated that travelers likely considered a subset of comparable sun destinations when booking vacation travel, and that substitution may be limited to specific alternatives. For example, stakeholder contacts were more supportive of switching between popular mid-tier sun destinations in Cuba, Mexico and the Dominican Republic or between higher-priced destinations in Jamaica and Costa Rica. The Bureau conducted an analysis of potential substitution for each overlap destination, and identified a number of destinations where demand is not driven by traditional vacation package offerings, and a significant proportion of travelers are purchasing airline tickets or visiting friends or relatives ("VFR"). The Bureau found that these travelers generally do not view these destinations, such as San Jose, Costa Rica, Fort-de-France, Martinique, and Pointe-à-Pitre, Guadeloupe as substitutable for other destinations.

The Bureau examined whether the Parties' competitive strategies were consistent with destination substitution, and reviewed the Parties' and competitors' strategic documents in order to identify any competitive responses across destinations. Documents often tracked competitors and market shares on an origin-destination pair basis. Despite Bureau requests for normal-course documents demonstrating monitoring or pricing strategies consistent with a market definition including all, or a subset of all, sun destinations, the Parties did not provide substantial normal-course business document evidence of cross-destination competition.Footnote 23 The Bureau did not find evidence that the Parties' capacity or pricing decisions were routinely constrained by service to alternative destinations.

In order to further assess the potential for destination substitution, the Bureau also considered the views of its empirical economic expert, who developed a model of competition on each relevant sun route where the Parties overlap. The expert conducted a hypothetical monopolist test using the extensive historical data on sales to Canadians collected from the Parties and other stakeholders, for each of air passenger service and vacation packages on the relevant routes. The Bureau's expert also examined historical sales and the cross-price elasticity of airline tickets and vacation packages across the relevant sun routes to determine whether there was evidence of destination substitution. On the basis of this analysis, the expert concluded that, for the purpose of analyzing the potential competitive effects of the Proposed Transaction, the appropriate relevant markets are the sale of airline tickets and vacation packages at the level of the origin-destination pair.

As a result, the Bureau concluded that the origin-destination pair approach remained appropriate for travel to the overlapping sun destinations. However, in light of qualitative information regarding consumer preferences, the Bureau considered broader market scenarios informed by the evidence, and found that this would not significantly change its conclusions regarding whether the Proposed Transaction would likely result in a substantial lessening of competition. This analysis is further discussed in section 7.3.2. below.

7.1.3.2 European destinations

The Bureau found that origin-destination pairs are generally the appropriate relevant market in the case of European travel. In contrast with sun destinations, the Bureau's interviews with stakeholders indicated that leisure travelers generally have a specific destination in mind when visiting Europe, further to a desire to visit particular tourist attractions or visit friends and relatives in a given location. Stakeholder interviews and documentary evidence suggest that certain transatlantic routes carry significant VFR traffic to European destinations. The Bureau also reviewed the results of a survey commissioned at the direction of the Parties, which indicated that a significant proportion of travelers to Europe considered multiple destinations when booking travel arrangements, and that travelers may change destinations in response to price increases.

The Bureau examined the Parties' pricing approaches and strategic documents, and found they were limited to competitive constraints associated with other products offered on the same origin-destination city pair. Evidence regarding pricing strategies on transatlantic city pairs indicated that competitive conditions were evaluated at the city pair level, strategies were determined according to competition by city pair, and tactical responses were limited to benchmark carriers on the same route.

In a limited number of markets, the Bureau considered whether itineraries involving other modes of transportation may be substitutable for air passenger service on a given route, particularly in certain parts of Europe (e.g. France, Brussels and Amsterdam) where high-speed rail service is widely available. Numerous carriers, including Transat, have relationships with other transportation providers allowing travelers to book itineraries containing air and rail components in a single transaction. Documentary evidence suggested that for certain European destinations, the price of direct flights may be constrained by the price of itineraries combining a direct flight and a rail leg. For example, direct flights from Montreal to Lyon may be constrained by itineraries containing a direct flight from Montreal to Paris and a rail trip from Paris to Lyon. In markets where evidence supported competition from intermodal itineraries, the Bureau accounted for this constraint in its further analysis of competitive dynamics, and found that this would not change its conclusions regarding whether the Proposed Transaction would likely result in a substantial lessening of competition.Footnote 24

The Bureau's empirical economic expert developed a model of competition and conducted a hypothetical monopolist test on each relevant transatlantic route. On the basis of this analysis, the expert concluded that, for the purpose of analyzing the potential competitive effects of the Proposed Transaction, the appropriate relevant markets are origin-destination pairs.

7.1.3.3 Domestic destinations

The Bureau concluded, consistent with previous reviews, that the relevant markets for domestic travel were origin-destination pairs. The Bureau reviewed evidence related to substitution between domestic destinations, and determined that travelers generally do not view cities in Canada as substitutable and airlines generally do not compete across routes. The Parties' strategic documents contained analysis of domestic routes at the origin-destination city pair level. The Bureau's empirical economic expert conducted a hypothetical monopolist test on each relevant domestic route, and concluded that each domestic origin-destination pair where the Parties overlap likely constitutes its own relevant market.

7.1.4 Vacation packages and independent vacations

Air Canada and Transat both offer vacation packages and air passenger service across the majority of their networks. Leisure travelers planning a vacation may choose to purchase a package including all necessary travel products (e.g. airline tickets, accommodations, car rentals) from a tour operator, or to independently purchase each component of their trip directly from suppliers ("independent vacation"). The Bureau found that vacation packages and independent vacations are not close substitutes, and likely constitute separate relevant markets.

Data collected by the Bureau suggests that a large majority of travel from Canadian cities to the overlapping sun destinations is sold as part of a vacation package. Stakeholder interviews indicated that Canadian leisure travelers who are driven by their desire to experience a warm climate in the winter and who value the convenience of a vacation package are unlikely to view independent travel components as a close substitute. Strategic documents provided by the Parties supported the view that vacation packages offered distinct benefits from air-only bookings.

With respect to transatlantic trips from Canadian cities to European cities, airline tickets are predominantly purchased independently. The Bureau found no evidence supporting substitution between vacation packages and airline tickets on transatlantic travel.

As a result, the Bureau concluded that vacation packages and independent vacations likely constitute separate relevant markets for the purposes of its analysis.

7.1.5 Connecting and non‑stop flights

In previous reviews of airline markets, the Bureau has determined that connecting itineraries involving one or more stops are not a close substitute for non‑stop flights. In the present review, given that leisure passengers are generally less time-sensitive than business passengers, the Bureau performed a detailed analysis of whether connecting itineraries may constrain non‑stop flights in the relevant areas.

7.1.5.1 European destinations

The Bureau found that with respect to leisure travel, connecting itineraries were most likely to compete with non‑stop flights on long-haul transatlantic journeys. The evidence collected by the Bureau suggested that in certain markets where both connecting and non‑stop service is available to leisure travelers, connecting itineraries with one stop may be close substitutes for non‑stop flights to European cities. The Bureau assessed the impact of one-stop competition on a route-by-route basis, based on information including the proportion of travelers selecting connecting itineraries, the Parties' fare strategies, and views of stakeholders. Strategic documents provided by the Parties and other stakeholders indicated that one-stop options, with connections in Canada or Europe, provided a competitive constraint for a subset of the overlapping transatlantic routes.

The Bureau conducted an analysis of the effectiveness of one-stop competitors on each of the overlap routes. Ultimately, the Bureau determined that on the transatlantic routes which raised competition concerns, the inclusion of one-stop itineraries would not materially affect concentration levels or whether the Proposed Transaction would likely result in a substantial lessening of competition.

7.1.5.2 Sun and domestic destinations

Based on evidence gathered during the Bureau's review, leisure travelers on sun and domestic routes generally prefer non‑stop flights. Following review of strategic and pricing documents, and discussions with stakeholders, the Bureau did not find evidence that connecting itineraries offered a significant competitive constraint to the Parties' non‑stop services to sun or domestic destinations. Stakeholders suggested that, particularly in the winter, Canadians prefer to fly directly from their origin city to their chosen sun destination. The Bureau found that its conclusions regarding the likely competitive effects of the Proposed Transaction on sun routes are insensitive as to whether or not connecting itineraries are included in the relevant market.

7.2 Removal of a vigorous and effective competitor

The Bureau reviewed a variety of evidence, including strategic and business documents, economic analyses, and interviews conducted with market participants, in order to confirm the extent to which Air Canada and Transat closely compete in the overlap areas. The Bureau found that there is significant rivalry between Air Canada and Transat to attract leisure travelers, and that the degree of competition between the Parties has increased as Air Canada has grown its Rouge subsidiary. The Proposed Transaction would result in the acquisition by Air Canada of a significant rival in the overlap areas.

Air Canada is primarily a full-service network carrier, which also operates a low-cost subsidiary and a tour operator division, while Transat is a leisure-focused airline and tour operator. In the course of its review, the Bureau examined the significant differences between the overall Air Canada and Transat business models. Air Canada offers extensive economy, premium economy, and business class offerings on its mainline operations in the relevant markets, while Transat exclusively targets travelers through economy and premium economy offerings. Air Canada's mainline service differs from Transat in that it offers business cabin classes and its overall product offering (including lounges, frequent flyer programs, and revenue management practices) and scheduling may be influenced by hub-and-spoke network considerations and the requirements of business passengers. On a number of the relevant routes this results in Air Canada offering more frequent service than Transat or offering year-round service where Transat flights are seasonal.

Nonetheless, the Bureau found that there is significant rivalry between Air Canada and Transat. Air Canada Rouge ("Rouge") was launched in 2013 with the expectation that it would enable Air Canada to compete more effectively against low‑cost carriers serving international and leisure destinations, including Transat. Since 2013, Air Canada has rapidly expanded Rouge, including within the Transat network, and increasingly replaced mainline service with Rouge operations. The result is that Rouge now competes on over 40% of Transat's total route offering and is Transat's principal rival for the routes on which Transat operates. The Bureau found that Rouge expansion has allowed Air Canada to operate in the overlap markets with a comparable cost structure to Transat, which has further contributed to the closeness of competition between the Parties.

Review of Air Canada documents suggested that Rouge operations resulted in the recapture of Transat share in the overlap areas, and a deceleration of Transat's transatlantic capacity increases after launch. The documentary evidence reviewed by the Bureau also confirmed the significant impact of Rouge expansion on Transat's operations, profitability, and strategic plans.

The Bureau also found, based on documentary evidence, that Transat acted as a vigorous and disruptive competitor to the A++ transatlantic joint venture, which has a capacity share exceeding 50% for passenger service between Canada and Europe. The Proposed Transaction would result in the acquisition by an A++ joint venture partner of the largest carrier unaligned with any major joint venture and operating on core A++ markets departing from Canada. Through the Proposed Transaction, Air Canada would acquire the competitor accounting for the largest increases in transatlantic capacity at its primary hubs in Toronto and Montreal.Footnote 25

The Bureau examined documentary evidence relating to multiple dimensions of competition in the overlap markets, including the determination of passenger fares, vacation package pricing, auxiliary fees (e.g. baggage fees, fuel surcharges), fare conditions (e.g. advance purchase, minimum stays, change fees), as well as network and capacity planning. The Bureau found that in their internal planning, Air Canada and Transat cited each other as close competitors, monitored each other's capacity and fare adjustments, and considered each other as benchmarks for both pricing and network planning decisions. Evidence confirmed that competition between the Parties was a factor in adjustments to fares, capacity, or auxiliary fees in both sun and transatlantic markets. The Bureau found that the Parties' tour operator divisions, Air Canada Vacations and Transat Tours Canada, are close competitors on routes to sun destinations, with a similar product offering in the markets where they overlap.

Although some stakeholders were of the view that the Proposed Transaction would result in broader and more frequent service, the majority expressed concerns that competition would be eliminated between two of the largest and most competitive (and sometimes the only) air passenger service and vacation package providers in the overlap areas. Stakeholders viewed Air Canada and Transat as offering comparable schedules and product quality; in Quebec, where each of the Parties have a significant presence, Air Canada and Transat were consistently identified as each other's closest competitors.

The Bureau does not attribute the loss of the actual or future competitive influence of a failing firm to the merger if imminent failure is probable and, in the absence of a merger, the assets of the firm are likely to exit the relevant market. Through both expert analysis and review of documentary evidence, based upon data and information collected for the period up to and including February 2020, the Bureau examined Transat's financial standing, in order to confirm whether it would have likely failed or exited the relevant markets absent the merger. The financial expert engaged by the Bureau determined that Transat failure was not likely, based on review of financial statements, strategic documents and other sources of information.

Instead, the Bureau found evidence that Transat's most recent strategic plan to strengthen its current business model sought to position it to compete more vigorously with Air Canada absent the Proposed Transaction. As of 2018, Transat began a five-year plan to offer a more robust network, including through:

  1. increased density, frequencies, and destinations throughout its network;
  2. growth in domestic feed network offerings, to support expansion of services,
  3. seeking alliance or feed traffic arrangements with airline partners; and
  4. an ambitious fleet renewal through acquisition of more flexible A321neo-LR aircraft.

The Bureau's review of strategic documents indicated that through many of these initiatives, Transat aimed to more effectively compete against carriers such as Air Canada, including, for example, through densification of its transatlantic operations. While the Bureau noted that Transat has experienced delays in implementing elements of its strategic plan, it did not find that Transat was likely to exit the relevant markets.

The Bureau's empirical economic expert also conducted a merger simulation in order to estimate the competitive effects of the Proposed Transaction in each relevant market. The expert found that the Proposed Transaction would likely lead to significant competitive effects and material price increases for passengers and purchasers of vacation packages in the relevant markets. The Bureau does not base its conclusions regarding whether a transaction is likely to result in a substantial lessening of competition on a specific numerical threshold for price increases, but considers such analyses together with its assessment of factors likely to constrain increases in price post transaction.

The Bureau's findings with respect to competitive effects in the relevant markets are summarized on a regional basis below.

7.3 Competitive effects

7.3.1 Trans-Atlantic routes

Air Canada and Transat are the primary airlines offering services between Europe and Canada, representing approximately 43% and 15% of total non‑stop seat capacity, respectively. The Parties face competition from major Oneworld and SkyTeam network carriers (namely Air France–KLM and British Airways), and a number of other carriers (TAP Air Portugal, Aer Lingus, Corsair, WestJet, LEVEL) on a subset of the transatlantic routes on which they operate.

The A++ joint venture between Air Canada, Lufthansa, and United provides for coordination of capacity planning, pricing, and revenue management on all transatlantic routes. As a result, the Bureau considered Air Canada, United Airlines, and Lufthansa (including its subsidiaries Brussels Airlines, Austrian Airlines, Swiss International, and Eurowings) as a single competing entity for the purposes of its analysis. The Bureau also considered participants in other revenue sharing joint ventures to compete as single combined entities.

The Bureau identified 27 transatlantic routes on which both Parties offer non‑stop service, all but one of which originate in Montreal or Toronto. Following Transat's withdrawal of non‑stop transatlantic service on Calgary-London and Vancouver-Paris, only Vancouver-London remains as a non‑stop overlap route originating in Western Canada. The Bureau also performed a detailed analysis of over 50 other transatlantic origin-destination pairs on which both Parties offer either non‑stop or connecting service. This includes a number of origin-destination city pairs on which no carriers offer non‑stop service, and both Parties serve passengers through connections in Toronto or Montreal (e.g. originating in Quebec City, Vancouver or Calgary).

In each case, the Bureau determined the level of concentration in the relevant market and evaluated the effectiveness of any remaining competitors based on documentary and other evidence. The Bureau conducted its analysis separately for the summer and winter IATA seasonsFootnote 26, in light of differences in competitive dynamics among seasons and seasonal services offered by the Parties and competitors. The Bureau considered market shares during the winter 2018/2019 and summer 2019 seasons, as well as schedules published for the winter 2019/2020 and summer 2020 seasons.Footnote 27 The Bureau found that, on certain routes, the Parties competed closely with other Canadian or European carriers. The Parties monitored these competitors' capacity and fare adjustments, and considered them as benchmarks for both pricing and network planning decisions. The Bureau considered each competing carrier's ability to constrain an exercise of market power by the Parties on the overlap routes, and conducted its analysis separately for each of air passenger service and vacation packages. In each market, the Bureau's empirical economic expert performed a merger simulation, which took into account the strategic reactions of competitors, in order to estimate the effects of the Proposed Transaction.

7.3.1.1 non‑stop overlaps

Based on this analysis, the Bureau determined that the Proposed Transaction would likely result in a substantial lessening or prevention of competition in 27 transatlantic markets in which both Parties offer non‑stop service, presented in Table 6.

Table 6: Transatlantic markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition (non‑stop overlaps)
Origin Destination Annual Non‑Stop and One‑Stop Passengers Parties' combined market share
Non‑stop service
Parties' combined market share
Non‑stop and one-stop service
Summer WinterFootnote 28 Summer WinterFootnote 29
Montreal Barcelona 100,388 100% 100% >90% >40%
Montreal Brussels 102,745 100% n/a >90% >80%
Montreal Lisbon 86, 505 100% n/a >90% >80%
Montreal Lyon 133,239 100% 100% >90% >80%
Montreal Marseille 93,826 100% 100% >90% >40%
Montreal Rome 135,884 100% 100% >90% >70%
Montreal Venice 57,565 100% n/a >90% n/a
Toronto Manchester 138,689 100% n/a >90% >70%
Toronto Venice 77,996 100% n/a >90% n/a
Toronto Zagreb 44,371 100% n/a >90% n/a
Montreal Nice 57,479 100% n/a >80% n/a
Montreal Toulouse 64,286 n/aFootnote 30 n/a >80% >30%
Montreal Bordeaux 54,796 100% n/a >80% >10%
Montreal Athens 93,104 >90% n/a >90% n/a
Toronto Athens 114,560 >90% n/a >90% n/a
Toronto Glasgow 96,144 >90% n/a >80% >70%
Toronto Porto 70,999 >90% n/a >80% >70%
Toronto Barcelona 145,846 >80% n/a >80% >60%
Toronto Rome 243,452 >80% n/a >70% >70%
Montreal London 182,136 >70% n/a >70% >70%
Toronto London 847,164 >70% >70% >70% >70%
Toronto Paris 285,063 >70% n/a >70% >60%
Toronto Lisbon 182,954 >60% >50% >60% >50%
Vancouver London 421,531 >60% n/a >60% >50%
Toronto Amsterdam 232,542 >60% n/a >50% n/a
Toronto Dublin 203,552 >60% n/a >50% n/a
Montreal Paris 844,375 >50% >70% >50% >70%

There are 16 origin-destination pairs for which Air Canada and Transat are the only providers of non‑stop capacity and do not compete with any other non‑stop carrierFootnote 31. On the vast majority of these routes, the non‑stop overlap between the Parties is effectively limited to the summer season. This includes Montreal-Toulouse, for which the Proposed Transaction is likely to substantially prevent competition given that Air Canada has announced non‑stop service beginning in summer 2020.

On these origin-destination pairs, the Bureau found that, as the only airlines offering non‑stop service, the Parties were each other's closest competitor. While the Bureau conducted an analysis of the competitive relevance of connecting itineraries for each route and found that one-stop passengers represent a significant share of overall traffic in certain markets, the inclusion of one‑stop itineraries did not change the Bureau's conclusions for these origin-destination pair. In each case, the Parties' market shares remain high, and Air Canada and Transat face few effective rivals with significant passenger shares, even where one‑stop itineraries are included. In each market, the Bureau's empirical economic expert found that the Proposed Transaction would likely lead to significant anticompetitive effects, including material price increases, for passengers or purchasers of vacation packages.

There are eight origin-destination pairs on which Air Canada and Transat face competition from only one other non‑stop competitor, or will face a single non‑stop competitor as of Summer 2020. On all but four of these routes, the Parties' shares of both passengers and projected capacity exceed 70%. On Toronto-Paris, the Parties face competition from a network carrier in Air France-KLM, which has announced an increase in non‑stop capacity as of summer 2020; nonetheless, the Parties' combined shares exceed 70% for the summer season. On Toronto-Amsterdam, the Parties' face competition from Air France-KLM, but hold market shares exceeding 60%. On Toronto-Dublin, the Parties compete with Aer Lingus and account for a market share in excess of 60%. On Toronto-Lisbon, the Parties compete with TAP Air Portugal, but account for a market share of over 60%. In all cases, the Parties' shares do not decrease significantly even when accounting for one-stop competition.

The Parties compete with multiple non‑stop competitors on only three routes, namely Montreal-Paris, Toronto-London and Vancouver-London, yet in all three cases the Parties' shares are significant, as is the rivalry between them.

7.3.1.2 Other overlaps

The Bureau determined that the Proposed Transaction would likely result in a substantial lessening or prevention of competition in an additional 22 markets, presented in Table 7, where both Parties offer non‑stop or one-stop service.

Table 7: Transatlantic markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition—Non‑stop/one‑stop or one‑stop/one‑stop overlaps
Origin Destination Annual Non‑Stop and One‑Stop Passengers Parties' combined market share
Non‑stop and one-stop service
Summer Winter
Quebec City Lyon 7,706 100% 100%
Quebec City Brussels 5,474 100% 100%
Quebec City Marseille 3,924 100% 100%
Quebec City Nice 2,189 100% n/a
Quebec City Barcelona 6,023 >90% 100%
Quebec City Paris 73,204 >90% >90%
Quebec City Rome 4,315 >90% n/a
Quebec City Lisbon 3,704 >90% n/a
Quebec City Venice 2,907 >90% n/a
Quebec City Madrid 1,638 >90% n/a
Quebec City Prague 1,162 >90% n/a
Toronto Madrid 66,474 >80% n/a
Toronto Prague 40,548 >80% n/a
Montreal Madrid 39,454 >80% n/a
Montreal Prague 27,827 >80% n/a
Montreal Dublin 32,372 >80% n/a
Montreal Zagreb 12,684 >80% n/a
Toronto Lyon 17,674 >70% >50%
Toronto Marseille 14,907 >70% >40%
Vancouver Rome 31,115 >70% n/a
Vancouver Venice 13,060 >70% n/a
Vancouver Barcelona 28,871 >60% n/a

These include a number of origin-destination pairs for which no non‑stop service is offered by any airline, and Canadians rely on the Parties' offerings with connections in Toronto or Montreal. In all cases, the Parties' market shares exceed 60% on the relevant routes.

In each of the markets presented in Tables 6 and 7, the Bureau's empirical economic expert found that the Proposed Transaction would likely lead to significant anticompetitive effects, including material price increases, for passengers and in certain cases, purchasers of vacation packages.

7.3.2 Sun routes

Air Canada and Transat are two of the four integrated airlines offering air passenger service and vacation packages from Canada to sun destinations. The Parties primarily face competition from Sunwing on sun routes departing airports in Quebec, and from Sunwing or WestJet on routes departing from Ontario, Western Canada and Atlantic Canada. The Bureau also assessed evidence regarding the effectiveness of the few additional competitors operating on limited origin-destination pairs in the overlap areas, including Delta Airlines and United Airlines (for routes to Florida), and Interjet (for routes to Cancun).

The Bureau found that Sunwing was the Parties' closest remaining competitor in the majority of the overlap areas and frequently influenced the pricing and capacity strategies adopted by Air Canada and Transat. The documentary evidence reviewed by the Bureau provided instances of price matching of Sunwing offers, benchmarking of Sunwing on key sun routes, and discussion of the impacts of aggressive Sunwing pricing on the Parties' operations. The Bureau separately examined the impact of Sunwing's presence on each of the relevant routes, as well as its ability to constrain an exercise of market power by the Parties, including through empirical means and expert analysis.

The Bureau also reviewed evidence regarding WestJet's offering to sun destinations, and found that WestJet was an effective competitor on a limited number of the overlap routes. The Bureau found that WestJet had a limited presence in Quebec markets, and the Bureau therefore considered WestJet's ability to constrain an exercise of market power by the Parties on a subset of the overlap routes.

The Bureau performed a detailed assessment of over 60 routes on which both Air Canada and Transat had substantial sales of airline tickets or vacation packages, originating in Toronto, Montreal, Quebec City, London, Moncton, Calgary, Vancouver, Halifax, and Ottawa. In each case, the Bureau determined the level of concentration in the relevant market and evaluated the effectiveness of remaining competitors based on documentary and other evidence. The Bureau conducted its analysis separately for each of air passenger service and vacation packages. In each market, the Bureau's empirical economic expert performed a merger simulation in order to estimate the effects of the Proposed Transaction in the relevant markets.

Ultimately, the Bureau determined that the Proposed Transaction would likely result in a substantial lessening or prevention of competition in 34 markets, presented in Table 8, including 6 routes which represent a merger of the only carriers offering non‑stop service.Footnote 32

Table 8: Sun markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition
Origin Destination Annual Non‑Stop Passengers Parties' combined market share
Non‑stop service
SummerFootnote 33 Winter
Montreal Samana 48,938 100% 100%
Montreal San Jose 34,190 n/a 100%
Toronto Cartagena 8,767 n/a 100%
Montreal Fort Lauderdale 425,718 >90% >90%
Montreal Puerto Vallarta 78,190 >90% >90%
Toronto Samana 38,359 >60% >80%
Montreal Cozumel 24,604 100% >70%
Montreal Punta Cana 408,480 >70% >70%
Toronto Fort Lauderdale 454,867 >70% >70%
Montreal Puerto Plata 109,583 >60% >70%
Montreal Liberia 25,100 n/a >70%
Toronto San Jose 66,731 n/a >70%
Quebec City Punta Cana 48,308 n/a n/aFootnote 34
Quebec City Cancun 70, 611 n/a n/aFootnote 35
Toronto Orlando 552,652 >60% >60%
Montreal Cancun 506,808 >50% >60%
Montreal Varadero 241,776 >50% >60%
Montreal Holguin 113,041 >40% >60%
Montreal Montego Bay 89,963 >40% >60%
Toronto Puerto Vallarta 115,308 >40% >60%
Montreal Pointe-à-Pitre 59,635 100% >50%
Montreal Fort-de-France 55,022 100% >50%
Montreal Cayo Coco 162,747 >50% >50%
Montreal Santa Clara 172,915 >50% >50%
Toronto Punta Cana 566,851 >50% >50%
Vancouver Puerto Vallarta 145,801 >50% >50%
Toronto Cancun 783,971 >40% >50%
Toronto Holguin 122,603 >40% >50%
Halifax Cancun 32,026 >60% >40%
Halifax Orlando 55,563 >40% >40%
Toronto Cayo Coco 186,739 >40% >40%
Toronto Puerto Plata 152,518 >40% >40%
Toronto Santa Clara 173,121 >30% >40%
Toronto Varadero 323,680 >30% >40%

In each of the markets presented in Table 8, the Bureau's empirical economic expert found that the Proposed Transaction would likely lead to significant anticompetitive effects, including material price increases, for purchasers of vacation packages and in certain cases, passengers.

As described in section 7.1.3.1, the Bureau concluded based on the preponderance of the evidence that origin-destination pairs were the appropriate relevant markets for its analysis of leisure travel to sun destinations. However, given that survey results and certain stakeholder interviews suggested that a proportion of leisure travelers were willing to substitute between a subset of sun destinations, the Bureau considered whether the effects of the Proposed Transaction would vary significantly if the Bureau adopted a broader market definition.

The Bureau found that its conclusions regarding a substantial lessening or prevention of competition would not significantly change even under broader market definitions informed by the evidence. For example, as shown in Table 9 below, the Parties account for a significant share from many Canadian cities even assuming substitution among sun destinations within a given country, within the set of primary destinations which account for approximately 85% of all travellers (Florida, Mexico, Cuba, Dominican Republic, Jamaica), and among all sun destinations. Similarly, the Bureau's empirical economic expert found that estimated price effects did not change significantly even after accounting for potential cross-destination substitution. Based on this analysis, the Bureau determined that adopting a broader market definition with respect to leisure travel to sun destinations was unlikely to significantly change its conclusions regarding any potential substantial lessening or prevention of competition resulting from the Proposed Transaction.

Table 9: Potential sun markets for which the Proposed Transaction is likely to result in a substantial lessening or prevention of competition
Origin Destination Parties' combined market share
Non‑stop service
Winter
Montreal Guadeloupe 100%
Montreal Martinique 100%
Montreal Costa Rica >80%
Montreal Florida, United States >80%
Montreal Dominican Republic >70%
Montreal Jamaica >60%
Montreal Mexico >60%
Montreal Cuba >50%
Montreal Florida, Mexico, Cuba, Dominican Republic and Jamaica >70%
Montreal All sun destinations >70%
Toronto Colombia >90%
Toronto Florida, United States >60%
Toronto Costa Rica >50%
Toronto Dominican Republic >50%
Toronto Mexico >50%
Toronto Cuba >40%
Toronto Florida, Mexico, Cuba, Dominican Republic and Jamaica >50%
Toronto All sun destinations >50%
Quebec City Dominican Republic 100%
Quebec City Mexico >50%
Quebec City Florida, Mexico, Cuba, Dominican Republic and Jamaica >60%
Quebec City All sun destinations >60%
Halifax Florida, United States >60%
Halifax Mexico >40%
Halifax Florida, Mexico, Cuba, Dominican Republic and Jamaica >50%
Halifax All sun destinations >50%

7.3.3 Domestic routes

The Bureau identified seven domestic routes on which both Parties offer non‑stop service. While Transat has historically offered a limited domestic network focused on feeding international flights, internal documents reviewed by the Bureau confirmed that increasing the frequency of its offering on certain domestic routes is a key component of Transat's strategic plan.

On each of the overlap routes, the Bureau considered concentration levels, documentary evidence regarding the extent of rivalry between the Parties, and the constraint offered by remaining competitors. The empirical economic expert also provided an assessment of the anticompetitive effects likely to result from the Proposed Transaction. Based on this analysis, as well as information regarding the expansion plans of competitors, the Bureau concluded that the Proposed Transaction would not likely lead to a substantial lessening or prevention of competition on domestic routes.

7.4 Entry and expansion in the relevant markets

The Bureau examined barriers to entry in the relevant markets, in order to assess whether timely entry or expansion would likely be sufficient to constrain a potential post-merger exercise of market power. The Bureau also sought to identify any potential poised entrant or airline positioned to expand its operations in each of the relevant overlap markets.

In conducting its analysis of entry in the relevant markets, the Bureau relied on the views of an independent industry expert with extensive experience in network planning and development of route strategy. The expert provided an assessment of the likelihood of entry in each market, as well as an analysis of the expansion prospects of competitors in the overlap areas.

Based on the expert's analysis and the evidence available to the Bureau, given the barriers to entry and expansion in the relevant markets, the Bureau found that no single carrier or combination of competitors is poised to replace Transat's presence in the markets of concern or its offerings to Canadian travelers, or to alleviate the concerns that are likely to result from the transaction.

7.4.1 Barriers to entry and expansion

The Bureau concluded that barriers to entry or expansion in the relevant air passenger service and vacation package markets are generally high. These include sunk costs and other barriers to entry common to all operations within the airline industry, as well as considerations specific to the domestic, transatlantic and sun routes at issue.

New air carriers in Canada face significant barriers to entry including a variety of regulatory and licensing requirements, branding and reputational barriers, and the need to secure substantial capital. New carriers must incur significant sunk costs to, for example, establish a base at an airport and achieve the economies of scale required for efficient airline operations.

Established domestic or international carriers wishing to enter the relevant routes must also overcome a number of barriers to entry:

Potential entrants on the overlap routes must also overcome challenges associated with competing with Canada's largest domestic airline, which holds a majority position in the relevant areas of Eastern Canada. The Parties account for over 60% of total capacity departing airports in Montreal and Quebec City, and at Toronto-Pearson airport. The Bureau's review confirmed that this presence allowed the Parties to achieve significant economies of scale, and also obtain preferential allocation of infrastructure, investment and significant decreases in operating costs at relevant airports. While the Bureau found that competitors operating a base at a destination airport may achieve similar economies of scale, competitors nonetheless cited the Parties' presence in Canadian airports, and dominant share on the relevant routes, as a factor in entry decisions.

The Bureau considered each of these potential barriers to entry in determining whether entry or expansion was likely to constrain an exercise of market power in the relevant markets.

7.4.2 Likelihood of timely and sufficient entry or expansion

The Bureau conducted an extensive analysis of potential poised entrants, in order to determine whether entry into the relevant markets was likely to occur in the case of a post-transaction exercise of market power. In total, the Bureau evaluated the plans and capabilities of over 20 competing airlines based on a review of documents from the Parties and third parties, stakeholder interviews, expert opinion and other information. The Bureau's network planning expert provided an analysis of potential poised entrants in each of the relevant markets.

In assessing the likelihood of entry, the Bureau considered competing airlines with a base of operations in the relevant origin or destination cities as the most likely candidates for entry, given the economies of scale involved in airline operations.

7.4.2.1 Transatlantic destinations

The Bureau's review did not uncover evidence indicating that entry or expansion by competitors would be likely, timely, or sufficient to constrain a potential exercise of market power on the routes listed in Tables 6 and 7.

The Bureau considered the history of entry in these markets, and found that successful entry events most frequently involved carriers with significant hub operations in Canada or at destination airportsFootnote 36, or Iimited entry on routes with significant local demand. Nonetheless, the Bureau focused its analysis on the potential for future entry in response to an exercise of market power and considered, among other things, the plans and capabilities of competitors and the potential impact of increasing use of long-range narrow-body aircraft.

In Europe, access to slots and infrastructure at key airports is likely to affect potential entrants. For example, the evidence indicated that entrants would face slot or infrastructure constraints in each of the following airports: Amsterdam Schipol, London Heathrow, London Gatwick, Dublin International Airport, Paris Orly and Lisbon Portela Airport.

Each of these airports are either operating at capacity or close to full capacity throughout the summer season, or are congested at the key times required for viable transatlantic service, which are generally focused on 6:00-11:00am arrival times and 11:00am-2:00pm departures. The Bureau found that certain of these airports are also experiencing infrastructure constraints, such as those related to a lack of available gates or ground handling capacity. Competitors seeking to operate on transatlantic routes must obtain suitable slot times and infrastructure at these airports, as well as Canadian airports such as Toronto Pearson.

Review of traffic data and strategic, business and planning documents also confirmed the importance of feed traffic to competitive operations on a number of transatlantic routes. Documentary evidence suggested that Transat had further plans to expand its access to connecting traffic in order to strengthen its service to European destinations.

7.4.2.2 Sun destinations

The Bureau's review did not uncover evidence indicating that entry or expansion by competitors would be likely, timely, or sufficient to constrain a potential exercise of market power on the routes listed in Table 8.

The Bureau considered the history of entry in the relevant markets, and found that successful entry events on the overlap routes most often involved Canadian carriers with a significant reputation and established domestic distribution, including the Parties, WestJet and Sunwing. The Bureau also considered the potential for expansion by nascent ULCC carriers in Canada, which have announced long-term plans to operate on certain overlap sun routes. For service to sun destinations, the Bureau's review found that potential entrants may face additional challenges associated with securing adequate hotel inventory at certain destinations, which is a critical requirement for effective competitors, given the importance of package vacations on the relevant routes. Based on documentary evidence and information provided by stakeholders, competitors in the relevant sun markets likely require sufficient scale to secure competitive hotel relationships. While the majority of the relevant sun destination airports are not slot-controlled, the Bureau found that congestion at customs and border clearance during key times at certain large airports may impact potential entrants. The Bureau also found that restrictions in fleet availability (including due to 737 Max 8 groundings, the duration of which are uncertain) were likely to limit the extent of entry and expansion in the relevant markets post-transaction.

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8. Findings regarding lessening and prevention of competition

The Commissioner of Competition has conducted an assessment of the Proposed Transaction between Air Canada and Transat, in order to report to the Minister and the Parties on any concerns regarding a potential prevention or lessening of competition as contemplated by subsection 53.2(2) of the CTA.

Based upon analysis of facts and information prior to the COVID‑19 pandemic, the Commissioner has determined that the Proposed Transaction is likely to result in substantial anti‑competitive effects through the elimination of rivalry between Air Canada and Transat in the areas of overlap between their networks. In particular, the Proposed Transaction is likely to result in the following if it proceeds in its current contemplated form:

  1. a substantial lessening or prevention of competition in the provision of air passenger services or vacation packages on 83 routes between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America;
  2. a merger of the only two carriers offering non‑stop service on 22 of these 83 routes; and
  3. a significant reduction in travel by Canadians in the overlap markets

The Bureau has attempted to fully explain the basis for its concerns in the foregoing report, while taking into account the confidentiality provisions in the Competition Act, and the Commissioner's mandate under the CTA. The Commissioner's concerns are the result of an assessment consistent with that conducted when applying section 92 of the Competition Act to transportation undertakings.

The Parties have indicated a willingness to work with the Commissioner to try to resolve the competition concerns and may propose certain measures they are prepared to undertake to address these concerns pursuant to subsection 53.2(5) of the CTA. In addition to providing his report, the Commissioner will engage with the Parties regarding undertakings offered and shall provide the Minister with his assessment of the adequacy of any such undertakings to address competition concerns, pursuant to subsection 53.2(6) of the CTA.

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Appendix A: Competition Bureau matters in the airline industry

Over several decades, the Bureau has performed numerous reviews relating to air services, including several resulting in applications to the Competition Tribunal under multiple sections of the Competition Act. These include applications under the abuse of dominance provisions regarding unilateral conduct (sections 78 and 79), merger provisions (section 92), and competitor collaboration provisions (section 90.1). In addition, the Bureau has investigated and prosecuted criminal price-fixing conspiracies under section 45 of the Competition Act. The Bureau has also provided one previous report to the Minister of Transport pursuant to 53.2(2) of the CTA, regarding the proposed merger of Bradley Air Services Limited and Canadian North Inc.

Select examples of the Bureau's reviews in this sector are summarized below.

First Air/Canadian North – Merger

In September 2018, Makivik Corporation and the Inuvialuit Corporate Group signed a definitive agreement to merger First Air and Canadian North, the primary airlines offering services in the Northwest Territories and Nunavut. On November 13, 2018, the Minister of Transport directed a public interest review of the transaction pursuant to subsection 53.1(5) of the CTA. Following a thorough investigation, the Bureau determined that the transaction was likely to result in a substantial lessening of competition in the provision of passenger travel and cargo service on a number of routes in Nunavut and the Northwest Territories, including reductions in passenger and cargo capacity, increases in price, and reductions in flight schedules. The Commissioner outlined his concerns in a report provided to the Minister on February 25, 2019, pursuant to subsection 53.2(2) of the CTA.

Northern Airline investigations

In 2017, the Bureau completed investigations relating to air passenger and cargo services in Northern Canada under the merger, abuse of dominance and civil competitor collaboration sections of the Competition Act. This included investigations of:

During the course of the Bureau's investigation, First Air and Canadian North terminated their codeshare agreement, resolving concerns regarding its potential impact on competition.

With respect to the merger between First Air and Calm Air and the investigation into allegations of predatory pricing by First Air and Canadian North, following a detailed investigation and analysis, the Bureau did not find that there was sufficient evidence to challenge the airlines' actions under the Competition Act.

Air Canada/United‐Continental Holdings – Merger and Strategic Alliance

In October 2010, Air Canada and United Continental Holdings announced their intention to enter into a joint venture that would have resulted in a merger of their operations on trans‐border routes between Canada and the United States. The Bureau reviewed the joint venture as well as three pre‐existing coordination agreements. It concluded that the joint venture would lead to a monopoly on ten transborder routes, and substantially reduce competition on several others. The Bureau filed an application with the Tribunal in June 2011 challenging the proposed joint venture under the merger provisions of the Competition Act seeking to unwind the three prior coordination agreements under section 90.1 of the Competition Act (which allows the Commissioner to challenge anti–competitive agreements—whether existing or proposed—between competitors). In October 2012, a Consent Agreement was reached, pursuant to which the parties are prohibited from implementing their joint venture agreement, or coordinating pursuant to their prior agreements, with respect to 14 high–demand trans–border routes.

Air Cargo conspiracy investigation

In 2006, the Bureau began an investigation under section 45 of the Competition Act into a conspiracy among international air cargo carriers in relation to international air cargo transportation on routes to and from Canada and elsewhere. This investigation into the fixing of fuel and other surcharges resulted in over $25 million in criminal fines by the end of 2013, with nine companies convicted:

Air Canada—Investigation regarding predatory conduct

In March 2001, the Bureau filed an application with the Tribunal seeking an order prohibiting Air Canada from operating flights on certain routes in eastern Canada at fares that did not cover their avoidable costs. The case was divided in two parts: phase one dealt with the application of the avoidable cost test and phase two would have determined if Air Canada had engaged in an abuse of dominant position under section 79 of the Competition Act. The Tribunal's decision in the first part of the case clarified the application of an avoidable cost test to assess predatory pricing in the airline industry, while the second part of the case was ultimately not pursued due to significant changes within the industry after the application was filed.

Canadian Airlines Corporation/Air Canada Merger

In December of 1999, one of Canada's major airlines, Canadian Airlines, had become insolvent and Air Canada proposed to acquire it. To gain regulatory approval and address the Bureau's concerns regarding this merger, Air Canada made certain binding undertakings to the Minister of Transport and the Commissioner. A number of these undertakings were aimed at fostering entry. For example, Air Canada was required to relinquish takeoff and landing times at slot congested airports and to refrain from operating a discount carrier in eastern Canada for a period of time.

Having determined that Canadian Airlines was facing imminent insolvency, the Commissioner of Competition decided that the merger, with undertakings, was more competitively preferable to a liquidation through bankruptcy proceedings.

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Appendix B: Relevant Provisions of the Competition Act and Canada Transportation Act

Canada Transportation Act (S.C. 1996, c. 10)

Review of Mergers and Acquisitions

Notice

53.1 (1) Every person who is required to notify the Commissioner of Competition under subsection 114(1) of the Competition Act of a proposed transaction that involves a transportation undertaking shall, at the same time as the Commissioner is notified and, in any event, not later than the date by which the person is required to notify the Commissioner,

(a) give notice of the proposed transaction to the Minister; and

(b) in the case of a proposed transaction that involves an air transportation undertaking, also give notice of the transaction to the Agency.

Information

(2) A notice given to the Minister or to the Agency shall, subject to the regulations, contain the information required under subsection 114(1) of the Competition Act. The notice shall also contain any information with respect to the public interest as it relates to national transportation that is required under any guidelines that shall be issued and published by the Minister. After receipt of a notice, the Minister may require the person who has given the notice to provide further information.

Guidelines

(2.1) The guidelines referred to in subsection (2) shall be elaborated in consultation with the Competition Bureau and shall include factors that may be considered to determine whether a proposed transaction raises issues with respect to the public interest as it relates to national transportation.

Not statutory instruments

(3) The guidelines referred to in subsection (2) are not statutory instruments within the meaning of the Statutory Instruments Act.

No public interest issues

(4) If the Minister is of the opinion that the proposed transaction does not raise issues with respect to the public interest as it relates to national transportation, the Minister shall, within 42 days after a person gives notice under subsection (1), give notice of the opinion to that person, in which case sections 53.2 and 53.3 do not apply in respect of that transaction.

Public interest issues

(5) If the Minister is of the opinion that the proposed transaction raises issues with respect to the public interest as it relates to national transportation, the Minister may direct the Agency to examine those issues under section 49 or appoint and direct any person to examine those issues under section 7.1 of the Department of Transport Act.

Report

(6) The Agency or person, as the case may be, shall report to the Minister within 150 days after being directed under subsection (5), or within any longer period that the Minister may allow.

Prohibition

53.2 (1) No person shall complete a proposed transaction referred to in subsection 53.1(1) unless the transaction is approved by the Governor in Council and, in the case of a transaction that involves an air transportation undertaking, the Agency determines that the transaction would result in an undertaking that is Canadian as defined in subsection 55(1).

Commissioner's report

(2) The Commissioner of Competition shall within 150 days after the Commissioner is notified of the proposed transaction under subsection 114(1) of the Competition Act, or within any longer period that the Minister may allow, report to the Minister and the parties to the transaction on any concerns regarding potential prevention or lessening of competition that may occur as a result of the transaction.

Report to be made public

(3) The report shall be made public immediately after its receipt by the Minister.

Concerns relating to public interest and competition

(4) After receipt of the Commissioner's report and any report given under subsection 53.1(6), but before the Minister makes a recommendation for the purposes of subsection (7), the Minister shall

(a) consult with the Commissioner regarding any overlap between any concerns that the Minister has in respect of the proposed transaction with regard to the public interest as it relates to national transportation and any concerns in respect of the transaction that are raised in the Commissioner's report; and

(b) request the parties to the transaction to address

(i) with the Minister any concerns that the Minister has in respect of the transaction with regard to the public interest as it relates to national transportation, and

(ii) with the Commissioner any concerns that the Commissioner has regarding potential prevention or lessening of competition that may occur as a result of the transaction.

Measures to address concerns

(5) The parties to the transaction shall

(a) after conferring with the Minister regarding concerns referred to in subparagraph (4)(b)(i), inform the Minister of any measures they are prepared to undertake to address those concerns; and

(b) after conferring with the Commissioner regarding concerns identified under subparagraph (4)(b)(ii), inform the Commissioner of any measures they are prepared to undertake to address those concerns.

The parties may propose revisions to the transaction.

Preconditions to recommendation

(6) Before making a recommendation for the purposes of subsection (7), the Minister shall obtain the Commissioner's assessment of the adequacy of any undertaking proposed by the parties to address the concerns that have been identified under subparagraph (4)(b)(ii) and the effects of any proposed revisions to the transaction on those concerns.

Approval of Governor in Council

(7) If the Governor in Council is satisfied that it is in the public interest to approve the proposed transaction, taking into account any revisions to it proposed by the parties and any measures they are prepared to undertake, the Governor in Council may, on the recommendation of the Minister, approve the transaction and specify any terms and conditions that the Governor in Council considers appropriate. The Governor in Council shall indicate those terms and conditions that relate to potential prevention or lessening of competition and those that relate to the public interest as it relates to national transportation.

Variation of terms and conditions

(8) On application by a person who is subject to terms and conditions specified under subsection (7), the Governor in Council may, on the recommendation of the Minister, vary or rescind the terms and conditions. If the terms and conditions to be varied or rescinded affect competition, the Minister shall consult with the Commissioner before making the recommendation.

Commissioner's representations

(9) If the Minister directs the Agency under section 49 to inquire into any matter or thing to assist the Minister in making a recommendation under subsection (7) or (8), the Agency shall give notice of the inquiry to the Commissioner and allow the Commissioner to make representations to the Agency.

Compliance with terms and conditions

(10) Every person who is subject to terms and conditions shall comply with them.

Competition Act (R.S.C., 1985, c. C-34)

Order

92 (1) Where, on application by the Commissioner, the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially

(a) in a trade, industry or profession,

(b) among the sources from which a trade, industry or profession obtains a product,

(c) among the outlets through which a trade, industry or profession disposes of a product, or

(d) otherwise than as described in paragraphs (a) to (c),

the Tribunal may, subject to sections 94 to 96,

(e) in the case of a completed merger, order any party to the merger or any other person

(i) to dissolve the merger in such manner as the Tribunal directs,

(ii) to dispose of assets or shares designated by the Tribunal in such manner as the Tribunal directs, or

(iii) in addition to or in lieu of the action referred to in subparagraph (i) or (ii), with the consent of the person against whom the order is directed and the Commissioner, to take any other action, or

(f) in the case of a proposed merger, make an order directed against any party to the proposed merger or any other person

(i) ordering the person against whom the order is directed not to proceed with the merger,

(ii) ordering the person against whom the order is directed not to proceed with a part of the merger, or

(iii) in addition to or in lieu of the order referred to in subparagraph (ii), either or both

(A) prohibiting the person against whom the order is directed, should the merger or part thereof be completed, from doing any act or thing the prohibition of which the Tribunal determines to be necessary to ensure that the merger or part thereof does not prevent or lessen competition substantially, or

(B) with the consent of the person against whom the order is directed and the Commissioner, ordering the person to take any other action.

Evidence

(2) For the purpose of this section, the Tribunal shall not find that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially solely on the basis of evidence of concentration or market share.

Factors to be considered regarding prevention or lessening of competition

93 In determining, for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, the Tribunal may have regard to the following factors:

(a) the extent to which foreign products or foreign competitors provide or are likely to provide effective competition to the businesses of the parties to the merger or proposed merger;

(b) whether the business, or a part of the business, of a party to the merger or proposed merger has failed or is likely to fail;

(c) the extent to which acceptable substitutes for products supplied by the parties to the merger or proposed merger are or are likely to be available;

(d) any barriers to entry into a market, including

(i) tariff and non-tariff barriers to international trade,

(ii) interprovincial barriers to trade, and

(iii) regulatory control over entry,

and any effect of the merger or proposed merger on such barriers;

(e) the extent to which effective competition remains or would remain in a market that is or would be affected by the merger or proposed merger;

(f) any likelihood that the merger or proposed merger will or would result in the removal of a vigorous and effective competitor;

(g) the nature and extent of change and innovation in a relevant market; and

(h) any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger.

Exception

94 The Tribunal shall not make an order under section 92 in respect of

(a) a merger substantially completed before the coming into force of this section;

(b) a merger or proposed merger under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act in respect of which the Minister of Finance has certified to the Commissioner the names of the parties and that the merger is in the public interest — or that it would be in the public interest, taking into account any terms and conditions that may be imposed under those Acts; or

(c) a merger or proposed merger approved under subsection 53.2(7) of the Canada Transportation Act and in respect of which the Minister of Transport has certified to the Commissioner the names of the parties.

Exception where gains in efficiency

96 (1) The Tribunal shall not make an order under section 92 if it finds that the merger or proposed merger in respect of which the application is made has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made.

Factors to be considered

(2) In considering whether a merger or proposed merger is likely to bring about gains in efficiency described in subsection (1), the Tribunal shall consider whether such gains will result in

(a) a significant increase in the real value of exports; or

(b) a significant substitution of domestic products for imported products.

Restriction

(3) For the purposes of this section, the Tribunal shall not find that a merger or proposed merger has brought about or is likely to bring about gains in efficiency by reason only of a redistribution of income between two or more persons.

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