The merger between the country’s biggest airline Air Canada (TSX:AC) and holiday travel specialist Transat A.T. (TSX:TRZ) has been pending for more than a year now. The pandemic has substantially changed the entire global aviation landscape. The deal, which looked like a “win-win” last August, now seems like the only lifeline for Transat.
Air Canada-Transat deal
Transat is in a weaker position among peer Canadian airlines. It reported a brutal 99% revenue decline in the second quarter of 2020. It has already laid off a sizable chunk of its workforce and is afraid of more of such measures to remain afloat. Canada’s harsh travel restrictions are making things all the more complicated for this $150 million airline company.
Transat shares are currently trading at $3.9 and have lost 25% in September alone. Interestingly, Air Canada must be rethinking its offer to buy Transat with an agreed price of $18 per share last year. The merger is now pending at the competition authorities, and the verdict is expected in late December 2020. A prolonged deadline puts Air Canada in a comfortable position and, in contrast, makes Transat more jittery.
Deal or no deal?
The delayed verdict will certainly wipe off some uncertainty. The flag carrier will likely get more clarity on air travel demand recovery and how stressed its financials for the next few quarters will be. At the same time, continuing with near-zero demand for another three odd months would make it highly jarring for Transat.
Competition authorities are arguing that the proposed deal would give Air Canada a controlling share of the transatlantic air travel, which will ultimately hamper competition. That might be true in the pre-pandemic scenario, but how things stand post-pandemic remains to be seen. Airlines might not be able to operate with similar capacities that they were for years before the outbreak.
Transat is a much smaller company in comparison to Air Canada. It carried around five million passengers in 2019 — nearly 10% that of Air Canada. Notably, the purchase would offer Air Canada an expansion in the holiday travel space and Transat’s decently sized fleet.
Can Air Canada get a sweetened offer from Transat?
However, why would Air Canada be interested in paying four times the current price for an embattled airline, with so many uncertainties? It will make sense if Transat sweetens its offer to woo the country’s biggest airline.
More importantly, Air Canada’s main focus would be to withstand the current situation longer. It has been raising capital on a war footing for the last few months. Though it is going through some of the most challenging periods, it is notably stronger due to its scale and a leading market share. It has comparatively more avenues to raise capital, which makes it stand tall in the current scenario.
Transat shares might continue to trade weak for the next few months. The uncertainties associated with a long-pending merger and Canada’s some of the harshest travel curbs make it difficult for it to carry on. Meanwhile, Air Canada must be waiting for travel restrictions to ease so that it alleviates some financial burden and resumes the cash flow cycle.
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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.