Air Canada-Transat merger review exposes impossible task facing EU regulators

As a number of governments across the Asia-Pacific region struggle with how to ensure they still have a functioning aviation industry once Covid-19 restrictions ease, regulators have shown a willingness to relax some competition rules. However, they are also drawing a hard line at anything that would lead to a post-pandemic scenario with substantially reduced

Pity the EU merger officials whose work sets them the near-impossible task of predicting how the world economy will look after Covid-19.

One of the first deals to lay this bare is Air Canada’s acquisition of its local competitor Transat, where decision day is looming. And that uncertainty risks plaguing an ever-growing number of mergers before the European Commission, as the crisis continues to deepen and companies begin to realize its longer-term implications.

The Air Canada-Transat deal doesn’t so much implicate Europeans, since no jobs are at stake in Europe, but there are others — Fincantieri-Chantiers de l’Atlantique, PSA-Fiat Chrysler or the planned IAG-Air Europa deal — where the European interest is more glaring.

A recent EU questionnaire to industry players in the Air Canada-Transat case reads: “Please do not take into account the coronavirus and the fact that your operations may be currently grounded”.

Explicitly asking respondents to ignore stark reality speaks volumes about the quandary EU merger regulators find themselves in.

In the document, the commission proceeds with business as usual, posing the same kinds of questions it has asked time and again in past evaluations of airline mergers.

Who flies between popular city pairs, like Toronto and London? Would travelers from Montreal to Brussels consider Paris or Amsterdam an alternative if tickets were cheaper? How many landing slots are free at Charles de Gaulle airport, the watchdog asks, probing whether disruptors could suddenly launch a Paris-Montreal flight.

The questions seem strangely tone deaf, in the wake of the coronavirus. Everything has changed for the airline industry, and it’s not clear if and when it might snap back.

As Calin Rovinescu, Air Canada CEO put it in a call with investors last week: “We are now living through the darkest period ever in the history of commercial aviation, significantly worse than the aftermath of 9/11, SARS or the 2008 financial crisis.”

He warned that “the duration of the pandemic and its fallout remain unknown.”

That sentiment is shared. In its earnings call last Thursday, Air France-KLM said it expected 80 percent fewer passengers this autumn year-on-year, and said it would take several years for traffic to recover to pre-crisis levels.

Worldwide airline association IATA last week estimated a drop in air-passenger revenues of $314 billion in 2020, up from earlier estimates. Air Canada recorded a net loss of more than a billion Canadian dollars, and IATA has implored the Canadian government to step in to provide urgent financial relief.

Indeed, airlines are getting propped up, in small ways for some, like SAS and Condor, and in a big way for others, such as the 7 billion-euro aid package for Air France-KLM. But not all want to, or will be, bailed out.

When the dust settles, which airlines will be left standing — and in what shape?

What kind of people will be flying, and how will the crisis have affected their preferences and behavior?

Such existential doubts make the question of yesterday’s competitors and flight patterns, yesterday’s passenger’s options and preferences seem largely irrelevant, and renders such data virtually useless as a predictive tool.

No crystal balls

Merger control is often criticized for being speculative — and that’s in ordinary times.

Predicting the future, the key tenet of merger control, necessarily involves some crystal-ball-gazing, but it’s usually based on something solid.

Companies are asked to provide detailed, exhaustive information about the last few years, analyzed from varying alternative perspectives. Experienced market players are asked their plans and predictions. Regulators operate on the assumption that things won’t likely be drastically different in the future.

When they block mergers, companies pick themselves up and move on. For example, a year after its bid to combine with Siemens was scuppered, Alstom is back at it, with a new plan to absorb Bombardier’s train business.

Plus the merger officials’ decisions are somewhat insulated from legal challenge by EU judges’ recognition that investigators merit a margin of discretion when they’re asked to peer into the future.

The coronavirus throws all that thinking up in the air.

Can the commission collect enough evidence in the current environment to make a decision that judges can say is legally sound?

The EU already has the “failing firm” defense in its arsenal, which would allow it to wave through a merger if it’s convinced the target firm is in such bad shape that it would inevitably exit the market anyway. While that defense has been applied restrictively in the past, the current circumstances might mean the companies will have the facts to justify it.

But beyond that exception, can the watchdogs allow a merger because there were sufficient competitors on the market, when it’s in doubt that they’ll still be around next year?

Can they block a merger on the basis of an argument that perhaps, after the crisis, some of the former players might disappear?

The consequences of, say, blocking the takeover of Transat could be severe — job losses, loss of capital, the need for a Canadian bailout and so on — at a time when demand cannot support one carrier, let alone two.

Other sectors

But while the airline sector is an extreme example — comparable to the cruise-ship industry or the hotel sector — officials will grapple with similar challenges in other industries as the crisis continues.

Will Europe’s car sector, for example, be impacted more by the merger between PSA and Fiat Chrysler, or by the subsidies being handed out to the industry?

One can sympathize, then, with the position of some regulators who have pressed “pause,” rather than forge ahead. For instance, the Danish competition authority announced it was suspending its merger-control operations because of the risk of otherwise wrongly prohibiting or allowing mergers.

Yet there are no easy answers. Standing still has consequences too, particularly when the regulator’s inaction prevents companies from taking steps they've deemed necessary to stave off the worst effects of the crisis.

The commission's file number for the Air Canada-Transat case is M.9489. The EU faces an initial deadline of May 25 — extended by 10 working days if the companies offer remedies — to decide whether to clear the deal or open an in-depth investigation.