TORONTO – For many in the travel industry, the WestJet-Sunwing acquisition deal appeared to come out of nowhere. But according to one aviation expert, there were signs throughout the past year that Sunwing was looking to sell.
Speaking to Travelweek, John Gradek, Faculty Lecturer and Academic Programs Coordinator, Supply Chain, Logistics and Aviation Management at the School of Continuing Studies, McGill University, says that Sunwing CEO Stephen Hunter let it be known “quite overtly” to the aviation community in the year leading up to the March 2 acquisition announcement that the airline was available for sale.
“It wasn’t a question of when, but who would be the appropriate suitor for Sunwing,” says Gradek. “I think [parent company] Onex basically saw a way for WestJet to solidify its presence in Eastern Canada without having to spend millions building it, so they decided to buy it with a purchase.”
Earlier this week, news broke that the WestJet Group intends to acquire Sunwing for an undisclosed amount, in a deal that includes both Sunwing Vacations and Sunwing Airlines. A new tour operating business unit will be created under the WestJet Group as a result. The purchase, still subject to regulatory approvals, is anticipated to close in late 2022.
The news comes two years into a global pandemic that has devastated the travel industry, particularly Canada’s airlines, which were forced to ground entire fleets and cut routes amid global border closures. Sunwing, like Air Canada and Transat, secured a government loan in early 2021. Sunwing’s loan was worth $375 million from the Canada Enterprise Emergency Funding Corp. under the Large Employer Emergency Financing Facility (LEEFF). WestJet remains one of the only airlines in the world that has not accepted sector-specific government aid.
Thanks to the proposed deal with WestJet, Sunwing will no longer require the LEEFF loan, which will be fully repaid upon closing of the transaction.
Although Sunwing faced unprecedented challenges during the pandemic – just like every airline in the world – the situation wasn’t too dire, says Gradek. In fact, “Sunwing had done very well this past winter,” selling its sun packages to Canadian-favourites like Cuba, Mexico, the Dominican Republic and Jamaica.
“I get the sense that [CEO] Hunter wanted to ride off into the sunset on a winning streak,” adds Gradek. “You have to remember that with Flair Airlines, and Lynx and Canada Jetlines and Porter, they’re all coming in with lots of airplanes. And guess where those airplanes are going to from October through April? They’re going to go south and that’s a lot of capacity to offer to the Sun market. So I think Hunter saw the writing on the wall and realized that though Sunwing is okay now, Winter 2022 and Winter 2023 may be a little dicey due to competition.”
What’s in it for WestJet?
In addition to the obvious benefits, like being able to offer more affordable fares, acquiring more planes and an expanded network, WestJet is also gaining what Gradek refers to as brand value.
“I think the brand value of Sunwing in Eastern Canada is significant,” he says. “And with WestJet offering primarily out of the Western Canadian basin – not to exclude mention of their 60 flights a week from Toronto to the Sun – the question became, where else can they go? Sunwing has a fairly good presence and has brand value in Eastern Canada. So that’s what WestJet’s doing, they’re really trying to build brand value and making themselves a truly Canadian sun operator.”
Gradek adds that WestJet also will take on Sunwing’s liabilities: “WestJet is now in a situation where they’re going to have to clear off the debt that Sunwing has incurred over the last 18-24 months.”
Why didn’t Air Canada step up to buy Sunwing?
The WestJet-Sunwing deal comes about a year after the failed Air Canada-Transat merger, which although approved by the Canadian Government, was ultimately given the thumbs down by the European Commission over competition concerns on transatlantic routes.
When asked whether he’s surprised Air Canada didn’t scoop up Sunwing when it had the chance, Gradek says there’d be more scrutiny involved with the legacy carrier.
“Remember, the federal government is now a shareholder in Air Canada. So whatever Air Canada does is going to have to be vetted through the eyes of its principle shareholder, ie. the federal government. So I don’t think the government was in a situation where it wanted to be accused of trying to command a change in the Canadian travel industry. So I think that Air Canada is trying to lie low in anything that would have regulatory review, and this certainly will have a regulatory review,” says Gradek.
The odds look good for approval
After the Air Canada-Transat deal fell through, will the WestJet-Sunwing transaction have a better shot at being approved?
Gradek certainly thinks so.
“With Air Canada-Transat, there was no doubt that the Canadian Government thought this was not an anti-competitive move, but the guys who killed it were the EU. They saw that the Transat operations out of France would be decimated by Air Canada,” he says. “But with WestJet and Sunwing, in my opinion it’s not anti-competitive. You’re not consolidating carriers or operators in the same neck of the woods. Yes, WestJet Holidays was operating out of Toronto but the Sunwing operation was significantly greater in Toronto.”
If there’s any unanswered question about the WestJet-Sunwing deal, adds Gradek, it’s about Sun operations out of YYZ.
“What do you do about the Toronto service to the Sun?” he says. “Will there be some caveat that says WestJet can reduce its presence in the marketplace and have it replaced by Sunwing? But that’s the only thing that I can see.”