Morningstar | Shares Jump on Air Canada's Agreement to Acquire Air Transat; Maintaining Our FVE
Shares for no-moat Air Canada rallied 4% after it announced an exclusive agreement to acquire Transat AT, owner of Air Transat, in a deal valued at CAD 520 million. The CAD 13 per share purchase price comes in at a 20% premium to Transat AT’s market price. We plan to leave our fair value estimate unchanged following the announcement as we believe increased fleet complexity offsets the benefits of gaining capacity in tight east Canadian markets. With Air Canada absorbing almost 3% of Canadian seat capacity through this agreement, we also think regulators could seek network alterations or divestitures before allowing the merger to proceed. Air Canada’s agreement with Transat likely eliminates the possibility of Onex combining the operator with WestJet, but the private equity shop could look to add new slots in the event regulators intervene.We believe continued consolidation of Canadian air space is a benefit to Air Canada, which controls more than 40% of the domestic market. Moreover, absorbing Air Transat’s high revenue Trans-Atlantic capacity will improve Air Canada’s international campaign and help it increase sixth freedom traffic by offering more seats through Canadian hubs for international bound U.S. travelers.
We assume Air Canada plans to bolster Rouge with its Air Transat combination. Air Canada’s preacquisition initiatives involved improving fleet commonality, allowing leases on mainline Airbus aircraft to expire between 2019 and 2020 and relying increasingly on Boeing aircraft. Adding Air Transat’s mostly Airbus fleet to its mainline fleet could complicate this transition and ruin synergies baked into its purchase premium. That said, we think the addition of A320LRs could drive better economics and greater capacity in Trans-Atlantic markets. We anticipate most of Air Transat’s assets will be soaked into Rouge because the airline is tightly focused on leisure markets and its fleet composition matches Rouge’s collection of narrow body Airbus aircraft.
Air Canada is a domestic and international airline Company. Co. is engaged in the provision of scheduled passenger services in the Canadian market, the Canada-United States transborder market and in the international market to and from Canada. Through its subsidiaries, Co. also operates in low-cost carriers segment, providing service to customers in lower density markets and also in higher density markets at off-peak times throughout Canada and the United States. Co. also provides air cargo services on domestic and the U.S. transborder flights; tour operator services which operate in the outgoing leisure travel market; and ground handling services.
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