On this Page:
- The Proposed Competition Measures are Insufficient in Scope
- The Proposed Competition Measures do not Accord with Principles of Merger Remedy Design
- Appendix A
- Appendix B
On October 25 2022, the Commissioner of Competition first outlined his competition concerns regarding the acquisition of Sunwing Vacations and Sunwing Airlines by WestJet Airlines Ltd. in a public report to the Minister of Transport as required by the Canada Transportation Act. On March 9, 2023, the Governor in Council approved the transaction, subject to certain terms and conditions.
The following assessment by the Commissioner related to proposed remedies received from WestJet in February 2023, and did not assess any subsequent changes made following discussions between Transport Canada and WestJet prior to approval of the final remedial measures by the Governor in Council.
March 2, 2023
Dear Minister Alghabra:
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 WestJet and Sunwing (collectively “the Parties”) to address the competition concerns presented by the proposed acquisition of Sunwing by WestJet (the “Proposed Transaction”) as set out in my report delivered to you on October 25, 2022 (the “Report”).
In that Report, I identified 31 routes between Canada and Mexico or the Caribbean for which the Proposed Transaction would likely result in a substantial lessening or prevention of competition. On these routes, my view was that the Proposed Transaction would likely result in substantial competitive effects, such as increased prices, reduced choice, decreased service, and a significant reduction in travel by Canadians, through the elimination of rivalry between the Parties. This conclusion was based upon analysis of facts and information collected prior to and during the COVID–19 pandemic, and the Report made note of the ongoing, though uncertain, recovery of travel demand, and of the fact that leisure travel (including travel to sun destinations) was widely expected to lead that recovery.
After a review of industry conditions following the publication of the Report in October, 2022, I continue to see a need for measures to address the competition concerns on the 31 routes identified therein as Canadian travel is restored. The Parties have not submitted to the Bureau that either WestJet or Sunwing would amount to a failing firm absent the Proposed Transaction.
The remainder of this letter will therefore detail my assessment of the adequacy of the remedial measures on the 31 routes identified in my Report. As outlined 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. In December 2020, the Bureau provided an assessment of proposed undertakings relating to Air Canada’s proposed acquisition of Transat A.T. Inc., an analysis which similarly involved travel between Canada and sun destinations.Footnote 1 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 raised by the Proposed Transaction.
My Report delivered to you on October 25, 2022 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 vacation packages on 31 routes between Canada and Mexico or the Caribbean;
- a merger to monopoly of the only two carriers and integrated tour operators offering vacation packages through direct service on 16 of these 31 routes; and
- a significant reduction in travel by Canadians in the overlap markets.
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 as of February 21, 2023, 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 2 As part of that policy, consistent with guidance from the Supreme Court of CanadaFootnote 3, the Competition Bureau requires that remedies be effective in ensuring that competition will not be substantially less than in the absence of a merger. In designing remedies, the Bureau aims to address competition concerns in all markets where a likely substantial lessening or prevention of competition has been identified. The Bureau further requires that remedies to anti-competitive mergers not only be effective in addressing competition issues, 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 are equally important in designing terms and conditions under section 53.2 of the CTA.
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 Insufficient in Scope
In my Report dated October 25, 2022, I identified 31 routes between Canada and Mexico or the Caribbean for which the Proposed Transaction would likely result in a substantial lessening or prevention of competition. On these routes, my view was that the Proposed Transaction would likely result in substantial competitive effects, such as increased prices, reduced choice, decreased service, and a significant reduction in travel by Canadians, through the elimination of rivalry between the Parties. The Parties have not submitted to the Bureau that one or both of the Parties would exit the relevant markets in the absence of the Proposed Transaction, nor provided evidence indicating that the extent of this rivalry would be affected by the Parties’ financial standing or other factors.
As such, the need for measures to address competition concerns remains on the 31 routes previously identified. As I noted in my Report of October 25, 2022, maintaining and encouraging healthy competition in these markets may be particularly vital to the interests of Canadian consumers post-pandemic, as leisure travel takes on an even greater importance amid the continuing industry recovery.
The majority of these 31 routes are entirely excluded from the proposed measures. In particular, no measure whatsoever has been proposed for 16 routes where I identified concerns regarding potential prevention or lessening of competition as a result of the Proposed Transaction. These excluded routes are listed in Appendix A. Given the nature of the proposed behavioural commitments, there is also no prospect of the included measures inducing entry on the 16 excluded routes, nor otherwise addressing or mitigating competition concerns on those routes. The proposal also does not include, for example, any measure designed to directly address the merged entity’s preferential access to destination hotels on the excluded routes, which I identified in my Report as contributing to competition concerns.
This, in and of itself, leads to a conclusion that the proposed measures are insufficient to ensure that the Proposed Transaction will not result in a substantial lessening or prevention of competition. Ultimately, the exclusion of the 16 routes listed in Appendix A from the proposed measures means that they 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 Bureau has also now assessed, or implemented, several competition remedies relating to mergers involving airlines and other aspects of Canadian travel.
The proposed measures are entirely behavioural in nature, and generally involve commitments to operate a minimum level of flight capacity on the 15 included routes, under certain conditions, for a specified period. In contrast, the anti-competitive effects that are likely to arise from the Proposed Transaction will result from a lasting structural change to the market—the elimination of Sunwing as a competitor. As I noted in my Report, the evidence indicates that Sunwing is an effective competitor with significant strategic advantages in the supply of vacation packages, which was the focus of my competition concerns. 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 substantial and long lasting.
As is noted in the Information Bulletin on Merger Remedies in Canada, 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 pro-competitive 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.
Ultimately, standalone behavioural remedies are seldom accepted by the Bureau to resolve competition concerns arising from mergers or proposed mergers, and they often cannot adequately replicate the outcomes of a competitive market. Even if such a remedy appears to be designed in clear and workable terms, it is likely to be less effective and more difficult to enforce than a structural remedy. In even fewer cases 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, as is the case with the proposed behavioural measures. 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, as opposed to prescribing specific behaviours relating to key dimensions of competition.
Proposed Behavioural Measures
The proposed measures, which involve conditional commitments to offer a minimum capacity on certain sun routes, suffer from many of the significant limitations commonly associated with standalone behavioural remedies and outlined above.
While capacity commitments may provide certain incentives to reduce prices, they cannot replicate the wide variety of competitive outcomes that would be associated with the presence of an effective, independent competing supplier of vacation packages, including as concerns dynamic aspects of competition in changing post-pandemic markets. This discrepancy is perhaps even more significant given the measures involve commitments and caveats relating only to flight capacity, while my competition concerns are focused on Canadians’ purchases of vacation packages. Furthermore, the relatively limited three-year duration of the capacity commitments will ensure that any mitigation of the Proposed Transaction’s anti-competitive effects is short-lived, and the commitments’ expiration does not appear to coincide with a specific expectation of entry or expansion in the included markets.
Although the proposed behavioural measures benefit from the use of a relatively observable and well-defined metric in scheduled seat capacity, there remain significant challenges and uncertainties associated with the design of the measures and the specifics of their implementation. In many cases, these deficiencies are such that I expect the measures will not offer a substantial constraint on the exercise of market power by the merged entity. In the context of growing travel demand post-pandemic, the use of the Summer 2022 and Winter 2022/2023 seasons as static benchmarks for future capacity commitments may allow for more significant anti-competitive effects, as capacity is likely to be held beneath the growing levels which may be expected if rivalry between the Parties were to remain. As noted in my Report, as well as in various industry projections, both travel demand and airline capacity is widely expected to grow during the period over which the capacity commitments apply, reducing the effectiveness of such benchmarks. Furthermore, even if such a benchmark is adopted, the proposed commitment to maintain 90% of currently available seats may allow for a substantial reduction in flights offered to Canadians at certain times of the year. Finally, the application of the capacity commitments as of the Winter 2023/2024 season, as opposed to immediately following the closing of the Proposed Transaction, risks allowing an interim period (perhaps as long as the entire Summer 2023 season) in which there may be substantial anti-competitive effects.
Other aspects of the design of the measures, such as the conditions imposed on the capacity commitments, may also significantly undermine their effectiveness. In particular, the measures specify that capacity commitments will not apply in cases where the scheduled capacity of WestJet, or all carriers combined, from a given Canadian origin to sun destinations exceeds certain thresholds. These limitations would likely allow for significant capacity reductions on some, or all, of the routes where rivalry between the Parties would be lost. It is my view that these conditions significantly reduce the likelihood that the proposed measures will constrain WestJet’s behaviour on the markets for which I expressed competition concerns. Further detail on my assessment of the specific terms of the proposed measures are provided in Appendix B.
Given their nature, the proposed behavioural measures are not likely to prompt entry or expansion on the 31 routes of concern identified in my Report and may, instead, have the effect of discouraging entry by competing airlines and tour operators. In light of the above, it is also my view that the design of the proposed measures is likely to reduce their effectiveness in addressing my concerns on the 15 included routes.
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 WestJet and Sunwing.
Commissioner of Competition
|Canadian Origin||Sun Destination|
|Calgary||San Jose del Cabo|
|Edmonton||San Jose Cabo|
|Saskatoon||San Jose del Cabo|
|Vancouver||San Jose del Cabo|
Select Comments on Capacity Commitment Measures
Should behavioural capacity commitments be adopted, the following deficiencies may further affect the measures’ effectiveness:
A duration beyond three years (ending Summer 2026) should be considered
In the absence of a structural remedy to address the structural change associated with the proposed transaction, a longer commitment period (or the potential for extension based on market conditions) may reduce the extent of anti-competitive effects.
Relevant SectionsFootnote 4
In the context of growing demand (and capacity) post-pandemic, a minimum commitment of ~90% of 2022 Seasonal Levels of capacity may be insufficient to limit anti-competitive effects
Absent the proposed transaction, it can be projected that demand and/or capacity would likely grow on certain routes, resulting in the commitment allowing a reduction in capacity as compared to the outcome absent the merger.
Conditions relating only to the offer of scheduled air seat capacity may allow for a lessening of competition in the supply of vacation packages
While the competition concerns in my Report related to the supply of vacation packages to Canadians, the included conditions (e.g. 1 (b)-(d)) would release WestJet from its capacity commitments if a given threshold of offered air seats was met, or if an air carrier were to enter and offer non-stop service. These conditions may allow for a substantial lessening of competition in the supply of vacation packages, even if they are met with regard to air seat capacity.
The point at which schedules are evaluated in order to determine whether conditions are met is inconsistent or unclear
Condition 1.(a) appears to require only that WestJet meet the relevant threshold “prior to the commencement of that season,” while conditions 1.(b) and 1.(d) appear to allow that the threshold be met at any time “prior to… or during” the season. Given the likelihood that schedules will change prior to and throughout a given season, more specificity in the evaluation of these thresholds should be considered, whether within the commitments or in the Implementation and Monitoring Agreement.
1.(a), 1.(b), and 1.(d)
Conditions which invalidate the route-level capacity commitment if scheduled capacities to all sun destinations (whether from WestJet or all airlines) exceed certain thresholds may allow for significant anti-competitive effects on the routes of concern
As written, conditions 1(a) and 1(d) appear to allow for significant capacity reductions on (or even the complete removal of) one or many of the routes of concern, provided seat offerings are generally maintained for other unrelated destinations. Given that the competition concerns expressed in the Report of October 25, 2022 focus primarily on specific route-level antitrust markets, these conditions make the capacity commitment particularly ineffective in mitigating my concerns, and should be removed.
1. (a) and 1. (d)
The definition of Sun Destinations is imprecise
The above concern regarding conditions 1(a) and 1(d) is further exacerbated by the definition of “Sun Destinations” which is imprecisely defined, and appears to potentially allow for consideration of various routes to Florida, the Caribbean, Mexico and Central America, whether or not they relate to sun vacation packages.
It is unclear how entry by a competitor, as discussed in 1(c), will affect the ongoing capacity commitments
The language of condition 1.(c) is unclear, at least as regards whether the capacity commitment will be reinstated in subsequent seasons if an entrant ultimately abandons or reduces its service. It is also unclear whether a seasonal entrant will affect the capacity commitment in the opposing, subsequent season (i.e. whether an entrant operating only winter service will invalidate the capacity commitment for future summers).
Beginning the capacity commitment in the 2023/2024 Winter Season may allow for interim harm
It appears likely that the start date of the capacity commitment will allow for an interim period of reductions of capacity – perhaps as long as the 2023 summer season, depending on the transaction’s closing date.