Assessment of the Adequacy of Proposed Undertakings Pursuant to Subsection 53.2(6) of the Canada Transportation Act – Proposed acquisition by Air Canada of Transat A.T. Inc.

December 9, 2020

Dear Minister Garneau:

In accordance with section 53.2(6) of the Canada Transportation Act (the “CTA”), please find herein my assessment of the adequacy of the measures proposed by Air Canada and Transat (collectively “the Parties”) to address the competition concerns presented by the proposed acquisition of Transat by Air Canada (the “Proposed Transaction”) as set out in my report delivered to you on March 27, 2020 (the “Report”).^{Footnote 1}

It is clear that the COVID-19 pandemic has had a severe impact on the financial positions of the Parties, as well as on their independent plans for the future. In assessing the adequacy of the measures proposed by the Parties, I sought evidence from the Parties about their most recent business plans taking into account COVID and post-COVID planning independent of the Proposed Transaction in order to determine whether there was any impact on the remedial measures necessary to address the competition concerns presented by the Proposed Transaction.

After a thorough review of the available evidence from the Parties about their future plans independent of the Proposed Transaction, I continue to see a need for measures to address the competition concerns in all 83 routes identified in my March 27, 2020, letter to you, except two.^{Footnote 2} With respect to those two routes, there is evidence that there is likely to be exit of one of the Parties independent of the Proposed Transaction, removing any overlap and consequently, the need for remedial measures.

As detailed further below, the Competition Bureau has significant experience in remedy design and implementation to address competition concerns across numerous industries in Canada, including the airline industry. Applying this experience and expertise to the undertakings proposed by the Parties, there are significant deficiencies in the measures proposed such that they do not address the competition concerns.

On This Page

• Background
• The Proposed Competition Measures are Inadequate
• The Proposed Competition Measures do not Accord with Principles of Merger Remedy Design
• The Proposed Measures are Unlikely to Result in Effective Entry
• Conclusion
• Confidential Appendix A
• Confidential Appendix B
• Footnotes

Background

Statutory Framework

My Report delivered to you on March 27, 2020 pursuant to section 53.2(2) of the CTA concluded that the Proposed Transaction is likely to result in the following:

• 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;
• a merger of the only two carriers offering nonstop service on 22 of these 83 routes; and
• a significant reduction in travel by Canadians in the overlap markets.

Section 53.2 of the CTA provides a framework whereby after receiving my Report and prior to you making a recommendation to the Governor in Council, the Parties shall inform me of any measures they are prepared to undertake to address the concerns I have regarding potential prevention or lessening of competition. This they did through a set of proposed measures submitted to me on October 20, 2020, and subsequently revised on November 12, 2020, and November 26, 2020.

Section 53.2(6) of the CTA requires that prior to making a recommendation to the Governor in Council regarding the Proposed Transaction you obtain my assessment of the adequacy of any undertaking proposed by the Parties to address my competition concerns and the effects of any proposed revisions to the transaction on those concerns.

This letter is my assessment of the competition undertakings proposed by the Parties, which I understand have also been provided to you.

The Bureau’s Approach to Merger Remedies

The Bureau’s current policy on merger remedies is detailed in its Information Bulletin on Merger Remedies in Canada.^{Footnote 3} As part of that policy, the Competition Bureau requires that remedies to anti-competitive mergers not only be effective in addressing the competition issues brought about by mergers, but also be enforceable and capable of timely implementation. To that end, remedial terms must be clear and measures must be sufficiently well defined to ensure that compliance can be determined and addressed. I am of the view that these same principles of clarity and precision are equally important in designing terms and conditions under section 53.2 of the CTA, especially given the significant penalties for non-compliance contained in section 53.6.

As I will elaborate in further detail below, the proposed competition measures do not remedy the competitive harm likely to result from the Proposed Transaction and in key respects those measures deviate from fundamental principles of merger remedy design.

The Proposed Competition Measures are Inadequate

In assessing the adequacy of the undertakings proposed by the Parties, I sought evidence from the Parties about their most recent business plans taking into account COVID and post-COVID planning independent of the Proposed Transaction in order to determine whether there was any impact on the remedial measures necessary to address the competition concerns presented by the Proposed Transaction. It is clear that the COVID-19 pandemic has had a severe impact on the financial positions of the Parties, as well as on their independent plans for the future. Each of Air Canada and Transat has significantly reduced the scope of its operations.

After a thorough review of the available evidence from the Parties about their future plans independent of the Proposed Transaction, I continue to see a need for measures to address the competition concerns on all 83 routes identified in my March 27, 2020 letter to you, except two.^{Footnote 4} With respect to those two routes, there is evidence that there was likely to be exit of one of the Parties independent of the Proposed Transaction, removing any overlap and consequently, the need for remedial measures.

With regard to the remaining 81 routes where competition concerns were identified in my Report, the need for remedial measures to address those concerns remains.

Many of these routes are excluded from the Parties’ proposed measures. In particular, no measures have been explicitly proposed for    routes where I continue to have concerns about a substantial lessening or prevention of competition in the provision of air passenger services or vacation packages as listed out in the Confidential Appendix A.^{Footnote 5}

I have carefully considered the evidence recently produced by Air Canada regarding the reduced scope of its future operations on certain routes identified in my Report,                                        . I am of the view that in the transatlantic markets that were the subject of my Report, Air Canada is likely to remain a vigorous competitor either on its own or through its joint venture partners. I have also carefully analyzed Transat’s post-COVID strategic plans as part of my assessment of the proposed measures.

In short, the exclusion of the    routes listed in Confidential Appendix A from the proposed measures means that those measures are insufficient to address my competition concerns.

The Proposed Competition Measures do not Accord with Principles of Merger Remedy Design

As I noted above, when designing and analyzing merger remedies, the Competition Bureau is guided by its policy on remedy design detailed in its Information Bulletin on Merger Remedies in Canada. The Bureau’s approach to remedy design is based on its experience implementing more than 50 merger remedies over the past 15 years.

The anticompetitive effects that are likely to arise from the Proposed Transaction will result from a structural change to the market—the elimination of Transat as a competitor. Unless this structural change is addressed through a structural remedy as opposed to a behavioural remedy, there is significant risk that the transaction’s anti-competitive effects will be long lasting. Below I set out the deficiencies with respect to the structural and behavioural measures proposed.

Structural Measures

With the possible exception of the slot measures, the competition measures proposed by the Parties are not structural.

The central competition measure proposed by the Parties relates to slot availability at Toronto Pearson, Montreal Trudeau and certain slot-controlled European airports. The slot release procedure proposed by the Parties differs from a traditional structural remedy in ways that impair its effectiveness and enforceability by                          
                                                                                                      
                                                                                                      
                                                                                                      .

In addition, the slot measures proposed in respect of Toronto’s Pearson Airport and Montreal’s Trudeau Airport do not include measures to ensure access to the slots and airport infrastructure sufficient to support effective entry at Toronto and Montreal. In particular, the airport authorities have ultimate control over the allocation and use of slots and infrastructure at the airports they operate. The implementation of the slot measures proposed is dependent on the cooperation and consent of the relevant airport authorities who may have competing interests to weigh in their duty to operate the airports. Further, the airport authorities are not proposed signatories to the proposed measures. Confidential Appendix B sets out a list of specific deficiencies in the proposed slot measures for your consideration.

Behavioural Measures

With respect to the interline, fare combinability, frequent flyer and lounge access measures proposed by the Parties, these are behavioural remedies.

Behavioural remedies are typically less effective than structural remedies. For example, behavioural remedies may prevent the merged entity from efficiently responding to changing market conditions and may restrain potentially procompetitive behaviour by the merged entity and/or other market participants. It is also difficult to determine the appropriate duration of a behavioural remedy, since it is often challenging to gauge how long it will take for new entry or expansion to be established in the relevant markets.

Competition authorities and courts generally prefer structural remedies over behavioural remedies because the terms of such remedies are more clear and certain, less costly to administer, and readily enforceable. Moreover, any attempt to provide for a standalone behavioural remedy usually imposes an ongoing burden on the Bureau and market participants, including the merged entity, rather than providing a permanent solution to a competition problem.

When the Bureau does consent to behavioural remedies it tends to do so in two situations: as a short term measure in support of a structural remedy (such as transitional supply services for the purchaser of divestiture assets), or as an information firewall to ensure that commercially sensitive information cannot be used for anticompetitive purposes by firms operating at multiple levels of a supply chain. Rarely will the Bureau accept a remedy that involves behavioural prescriptions with respect to firms’ key strategic or tactical variables such as pricing, capacity, product positioning, or investment. For example, in the only instance in which the Bureau has implemented a remedy in respect of an airline merger or joint venture, it entered into a Consent Agreement with Air Canada and United Continental Holdings in October 2010 that expressly prohibited the two airlines from implementing their proposed joint venture on 14 high-demand Canada-United States transborder routes

Taking these factors into account, the interline, fare combinability, frequent flyer and lounge access measures proposed by the Parties are behavioural remedies that suffer from fundamental flaws, costs, disadvantages and risks.

Among the likely implementation issues associated with the interline measure is its complexity. In appropriate circumstances, interline agreements can provide a framework for more efficient interline ticketing and the generation of feed traffic between airlines. However, that efficiency is dependent on:

• an opaque substructure of dynamic pricing, inventory management and billing settlement that is difficult to understand and monitor; and
• the bilateral economic interests of the signatories.

In other words, interline agreements work when it is in the interests of their signatories to make them work—the interline partners benefit by being able to jointly offer tickets that they would otherwise be unable to offer individually. This is a different situation than that contemplated under the proposed measure—where Air Canada would be required to enter interline agreements against its economic interests and subject to monitoring that is unlikely to be effective.

The fare combinability measure proposed by the Parties is also inadequate in several respects. The fundamental premise behind this measure is that a new entrant on a route would likely have a low number of frequencies relative to Air Canada and would therefore not be able to offer an attractive schedule. The measure proposes to address this schedule deficiency by empowering the entrant to cross-sell services on Air Canada flights so that the entrant could combine the sale of an outbound flight on its own aircraft with the sale of a return flight on an Air Canada aircraft. An entrant that would need to rely on Air Canada to such an extent is unlikely to provide effective competition to Air Canada.

The lounge access measure is not responsive to a competition concern raised in my Report—I do not view lounge access as a meaningful barrier to entry on the routes that are the subject of my Report. I therefore do not think this measure is properly characterized as a competition measure.

The frequent flyer measure would involve an entrant relying on Air Canada’s frequent flyer program. If an eligible entrant were to choose to activate these measures, Air Canada would have access to competitively sensitive information on the identities, demographics, preferences, purchasing patterns, and redemption preferences of the new entrant’s customers.

In short, the behavioural measures proposed by the Parties are inadequate and would create an ongoing commercial link between an entrant and Air Canada whether in the form of a dependence on Air Canada feed traffic, a reliance on marketing Air Canada flights, or the transmission of the entrant’s competitively sensitive information to Air Canada. An entrant that would be dependent on Air Canada to such a degree will not be effective in disciplining the enhanced market power of the merged entity.

Lastly, the exigencies of the proposed measures with respect to ongoing monitoring are significant, and would require the monitor to operate beyond an oversight function. Key features of the slot, interline and fare combinability measures would require the monitor to oversee and rule on complex issues with inadequate guidance, insufficient investigative powers, and a level of discretion that decreases the certainty and predictability of implementation effectiveness. In the Bureau’s experience, these types of arrangements are not effective.

The Proposed Measures are Unlikely to Result in Effective Entry

In light of the deficiencies in the proposed measures that I have outlined above, I am concerned that the measures are unlikely to result in effective entry on the    routes that they are intended to target, and do not address any of the competition concerns identified with respect to    additional routes.

In my Report, I indicated that 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. This exercise involved an evaluation of 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. I would note that many of those 20 airlines already had (and continue to have) commercial relationships with Air Canada on terms similar to certain of the measures being presently proposed by the Parties, particularly those related to interlining.

The extensive entry analysis conducted by the Bureau 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 in the 81 routes identified in my Report where both Parties are likely to continue to operate absent the transaction—a finding that was made prior to demand for air travel and vacation packages being impacted by the pandemic.

I have considered entry in light of the remedial measures proposed by the Parties taking into consideration the recent submissions of the Parties and the availability of contemporary information, including from potential entrants within the context of the pandemic. I am of the view that potential entry is even less likely than at the time of my Report.

Properly designed measures to address slot availability at certain European airports may clear the way for likely entry or expansion on a small minority of the routes covered by my Report                                          . However, I am of the view that the proposed measures are insufficient to generate entry on the scale and of the sufficiency needed to remedy the likely competitive effects of the transaction across all    routes that are the subject of those measures or in the    additional routes for which no measures have been explicitly proposed.

Conclusion

For these reasons set out above, it is my assessment that the measures proposed by the Parties do not address the competition concerns likely to result from the merger of Air Canada and Transat.

Yours truly,

Matthew Boswell
Commissioner of Competition

Confidential Appendix A

[CONFIDENTIAL]

Confidential Appendix B

[CONFIDENTIAL]