Canada’s airlines: Status quo persists despite changes in "arcane" foreign ownership levels
Canada remains one of the more protectionist of the major aviation countries, but recently approved modest changes to foreign ownership limits of Canada's airlines could result in those carriers garnering increased attention from investors outside the country. However, the limited scope of the changes means the impact on potential ownership structures is unlikely to be significant.
Some of Canada's aspiring ULCCs have been exempt from foreign ownership limits for more than a year; however, it does not appear that those airlines have attracted high levels of interest from investors outside the country. Part of the reason is that no single foreign entity can hold more than 25% of voting shares of those airlines.
That restriction now applies to all of Canada's airlines, which could limit the interest foreign investors have in the country's air carriers even as the changes in foreign ownership levels are welcomed by the industry at large. However, the approval process for joint ventures between Canadian airlines and their respective partners is also changing, which could spur additional immunised tie-ups between Air Canada and WestJet and their prospective partners.
- Canada recently approved modest changes to foreign ownership limits of its airlines, potentially attracting more attention from foreign investors.
- The limited scope of the changes means the impact on ownership structures is unlikely to be significant.
- Canada's aspiring ULCCs have not attracted high levels of interest from foreign investors due to restrictions on voting shares.
- The recent increase in foreign ownership caps for Canadian airlines is not expected to result in a significant influx of foreign capital.
- Complexities in establishing ownership and governance structures to satisfy the definition of 'Canadian' may deter foreign investors.
- Changes in the approval process for joint ventures between Canadian airlines and their partners could benefit the industry by allowing for more immunised tie-ups.
Summary
- Discussions about changing foreign ownership thresholds for Canada's airlines have been ongoing for more than two years
- It does not appear that Canada's aspiring ULCC's are seeing huge benefits from waivers they received on foreign ownership limits from the government in 2016
- Canada's airlines may benefit more from changes in the approval process for joint ventures
Changes in foreign ownership limits have been batted about for at least two years
Discussions about raising Canada's foreign ownership levels in the country's airlines ratcheted up in 2016 after the release of a policy document that reviewed the Canada Transportation Act.
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One of the recommendations from that review was raising foreign ownership limits to 49% from 25%. At that time, InterVISTAS chief economist and chief strategy officer Mike Tretheway stated the Canadian equity market had not been very kind to airlines, and he suspected the country's two largest airlines, Air Canada and WestJet, were undervalued.
A relaxation of foreign ownership limits in ULCCs has not resulted in major changes
Subsequent to the review of Canada's transport policy, the country's government opted to relax foreign ownership restrictions for aspiring ULCCs from 25% to 49%.
After those airlines received that waiver from the government, one of the upstart ULCCs, Jetlines, stated it had received significant undisclosed airline investors and, at one point, the US ULCC specialist investor Indigo pPrtners was examining an investment in Enerjet.
See related report: ULCC model arrives in Canada, with Jetlines, Swoop. Unclear foreign ownership rules still a deterrent
But in late 2017 one major ULCC investor, Indigo Partners, dismissed the changes as unhelpful. Indigo recently ordered Airbus' largest ever order, of some 430 A320 family aircraft, but is unwilling to enter the Canadian market. Managing Partner Bill Franke stated that Canada's foreign ownership laws remained arcane. Indigo drew that conclusion after an 18 month study of the Canadian market.
Executives from Enerjet told CBC News in Aug-2017 that the Canadian Transport Agency was weighing whether foreign investment would make sure that Enerjet's day-to-day operations would still be controlled by Canadians. The formal regulatory title is "Control in Fact".
Overall, it does not appear those changes to foreign ownership levels for ULCCs have resulted in a lot of foreign capital flowing into those companies, which is likely driven in part by no single foreign entity being allowed to hold a 25% voting interest.
Complexities remain even as "arcane" foreign ownership caps are increasing
Now Canadian legislators have passed broad transport legislation that includes a permanent increase in foreign ownership caps for Canada's airlines from 25% to 49%. Other countries and regions that have similar foreign ownership levels include the EU, Australia, Kenya and Peru.
See related report: US airline foreign ownership; time for a rethink
But with no one foreign entity allowed to hold more than 25% of a Canadian airline's voting shares, foreign investment levels are not likely to move dramatically.
As Canadian legal firm Clark Wilson highlights: "Although this change provides greater flexibility in structuring foreign investment in Canadian aviation companies, most of the challenges and complexities involved in establishing an ownership and governance structure to satisfy the definition of 'Canadian' remain."
Foreign investors could be deterred by those complexities that airlines need to master in order to maintain to the government that they are indeed, Canadian, and the result is non-Canadian investors aren't likely to rush into investing in Canada's airlines despite the hype over increasing foreign ownership levels.
Airlines could benefit more from changes in the JV approval process
One aspect of changes in Canadian Transport Law that could benefit Canada's airlines is how joint ventures between the country's airlines and their prospective partners are approved. According to another Canadian law firm Blake, Cassels Graydon, now Canada's Minister of Transport has the authority to determine if a joint venture is in the public interest and fare competition. Previously, JVs were reviewed by Canada's Competition Bureau.
Under the new legislation, Canada's Minister of Transport will evaluate proposed joint ventures for public interest benefits and their competitive effects. The country's Commissioner of Competition will supply a report to assist the Transport Minister's review.
"If the Minister of Transport is satisfied that the proposed joint venture is in the public interest, he or she has the authority to approve it, without separate approval from the Competition Bureau," the legal firm stated.
Star Alliance partners Air Canada United attempted to forge a crossborder JV in 2012, but abandoned those efforts after the Competition Bureau determined the tie-up would significantly reduce competition in a number of markets. During the last year, Air Canada has hinted it would be interested in possibly re-starting joint venture talks with United, and those discussions could accelerate now that Delta and Canada's second largest airline WestJet are attempting to create a new transborder joint venture.
The status quo is likely to remain intact despite changes to foreign ownership limits
The recent changes in Canada's transport laws show some progress in liberalisation, but the increase in ownership caps appear inadequate to attract significant levels of foreign investment in the country's airlines, so the status quo is likely to persist.
Changes in the way joint ventures are approved have the potential to benefit Canada's airlines as the country's largest carriers work to position themselves to build partnerships to compete more effectively, and presumably, drive revenue growth.