A planned takeover of Transat by Air Canada has been abandoned due to competition hurdles imposed by Brussels.

The deal between the Canadian carriers was originally agreed in June 2019.

The terms were subsequently amended two months later and then revised last October as a result of the severe economic impact of the Covid-19 pandemic.

But the acquisition was conditional on the approval of various regulatory authorities, including the European Commission.

Transat has said it requires new financing of at least of C$500 million in 2021.

Its operations are temporarily suspended until June 14 due to measures to combat Covid announced by the Canadian government in March. Air Canada is running a reduced schedule including daily Toronto-Heathrow flights.

Transat said it has “been taking and will continue to take all measures available to it to preserve cash and, as previously announced, it has put in place a C$250 million short-term subordinated credit facility, which matures on June 30 and will need to be replaced or extended before that date”.

But its financial position and business prospects could be “materially and adversely affected” if it is not able to renew maturing facilities at acceptable conditions or find financing alternatives.

The company hopes to revive a previous acquisition plan put forward by investment company Gestion.

Transat said: “There is significant pent-up demand among customers in the corporation’s primary segments of leisure travel and visiting friends and relatives (VFR), which are expected to recover sooner than business travel.

“Transat’s smaller aircraft fleet provides greater flexibility and efficiency, and the corporation benefits from a well-respected brand that customers love, as well as committed staff members and a strong distribution network.”

Announcing the termination of the merger, Air Canada said it offered and enhanced a significant package of remedies, which went beyond the “commercially reasonable efforts” required of it and what was traditionally accepted by the EC in previous airline merger cases.

The airline added: “Following recent discussions with the EC, it has become evident, however, that the EC will not approve the acquisition based on the currently offered remedy package.

“After careful consideration, Air Canada has concluded that providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada’s ability to compete internationally, negatively impacting customers, other stakeholders and future prospects as it recovers and rebuilds from the impact of the Covid-19 pandemic.

“Especially in this challenging environment, it is essential that Air Canada focus on creating the optimal conditions for its full recovery by preserving and leveraging all of its key strengths and assets including its strong employee culture.”

As a result, Air Canada will pay Transat a termination fee of C$12.5 million.

Transat president and chief executive Jean-Marc Eustache said: “This transaction, first contemplated more than two years ago, was complicated by the pandemic, and, ultimately, Air Canada reached its limit in terms of concessions it was willing to provide the European Commission to satisfy their competition law concerns.

“While both companies expected the proposed transaction to result in compelling benefits to shareholders, customers and other stakeholders, and even though we had received approval from the Canadian authorities, it has now become evident that we would not obtain the approval of the European Commission.

“Under these circumstances, Transat and Air Canada therefore mutually agreed that terminating the arrangement agreement was in our respective best interests.

“Now that Transat is no longer constrained by the limitations under the arrangement agreement, we are free to take the necessary steps to ensure a successful, long-term future, beginning by securing long-term financing to provide Transat with the flexibility to deliver on its strategic plan.”

Eustache added: “The global air transportation and tourism industry has been among those most affected by the Covid-19 crisis.

“However, the arrival of vaccines brings us a light at the end of the tunnel, and Transat is well positioned to bounce back.

“In close to 40 years of existence, we have traversed numerous crises and each time, we emerged stronger than before, demonstrating our resilience as an organisation. We look forward to a safe and healthy future, as we hopefully put this pandemic behind us.”