RE:RE:Airline Investor & OTB comments?To add to OTB’s and invinceableone’s posts:
A significant driver for the merger with Air Transat was its fleet of A321LR aircraft. Leasing companies captured most of the early delivery slots for the LR version, and Air Transat reached an agreement to lease these aircraft in 2018. The earliest delivery slot Air Canada could hope for was 2024. (Recall the original orders of Boeing 737 Max9 did not have the same range capability, and operating economics, as the Airbus A321 LR. These orders were cancelled earlier this year.)
Click on the link below for my post about the A321LR: A Game Changer for Air Canada
https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=31711709 On 24 February 2021, Norwegian Air, as part of its restructuring, announced that it had cancelled orders for 30 Airbus A321 aircraft. Other airlines have also cancelled leasing arrangements (and firm orders) and/or at the very least delayed delivery of these aircraft.
It appears that an opportunity may have presented itself for Air Canada to acquire the A321 LR aircraft at very favourable leasing rates – more favourable than Air Transat’s leasing rates – and on a favourable delivery schedule that would allow the airline to introduce these aircraft into its fleet as demand warrants, over the next year or so.
So, the decision to cancel the merger with Air Transat would take into consideration a number of factors including,
but not limited to, the following:
- Air Transat’s increasingly troublesome debt load
- an uneven recovery, domestic first, the U.S., a close second and international third
- the availability of A321 LR at attractive rates and with favourable delivery dates
- a more favourable market now for mid-life Airbus A330s (the wide-body aircraft in Air Transat’s fleet) which could be acquired over the next year or two as demand warrants
- the ability to use the Rouge Boeing B767s (currently parked) in the meantime
Here are excerpts from an earlier post for background on Air Transat to give you an idea of their ability to compete going forward:
Much of Air Transat’s early growth came at Air Canada’s expense. Air Canada’s higher cost structure made it difficult for the Company to curtail Air Transat’s expansion - until Air Canada Rouge entered the picture in 2013. With a lower cost structure than mainline, the Rouge product was effective in the leisure market against both Air Transat (and WestJet).
By 2014 Air Transat’s revenue had peaked at $3.75 billion, and over the next five years, revenue and EBITDA decreased. By October 2019, Air Transat’s five-year compound growth rate in revenue had declined by 4.8 percent annually while EBITDA declined 22.9 percent annually over the same period. Between 2014 and 2019, Air Transat’s average EBIT margin over this period was less than one half of one percent (source: Capital IQ).
Not all of this decline should be attributed to Rouge. Air Canada’s introduction of its mainline Boeing B777 hi-density aircraft (450 seats) on the Montreal to Paris route significantly altered the competitive landscape, a route that generated considerable passenger traffic which, until then, was mostly captured by Air Transat and Air France.
Air Transat’s response to increased competition was to avoid competing head-to-head with Air Canada wherever feasible, choosing instead to focus more on secondary markets. This was likely a main driving force in AT’s decision to acquire the Airbus A321 LR aircraft (and to move to an all Airbus fleet by 2022, A330s and A321s).
Air Transat’s newly adopted strategy to compete against Air Canada is an untested one and not without considerable risks. As OTB has already pointed out, without leading edge (and pricey) IT systems, particularly on the revenue management side of the business, Air Transat’s ability to compete against a much stronger Air Canada will be a major challenge.