Not to be outdone by the Onex/WestJet deal, Air Canada (Air Canada Stock Quote, Chart TSX:AC) is making headlines this week with its bid to buy rival travel company Transat AT. And while the market seems to approve, as the stock hit a new high of $40.00 on Thursday, the long-term prospects not just for AC but for the rest of the airline space could be trickier to navigate, says Tim Nash of Good Investing, who argues that macro headwinds related to climate change will make profitability more difficult.
Air Canada this week announced it was in exclusive negotiations with Transat, which runs the Air Transat holiday travel company, in a $520-million deal that would value Transat at $13.00 per share, a 22-per-cent premium to its share price as of Wednesday’s close. Already on an attractive incline, Air Canada’s share price jumped four per cent on Thursday, bringing the stock now up a remarkable 55 per cent year-to-date.
But the Transat deal will have to be approved by the Competition Bureau of Canada, and that’s where it’ll likely run into hurdles, says Nash.
“It will be interesting to see what the Competition Bureau has to say about it. It’s far from a done deal,” says Nash to BNN Bloomberg on Thursday. “For me, all of the airlines are in a very challenging business in that everyone is very cost competitive and the margins aren’t very high, so I really don’t like airlines.”
An expert on sustainable investing, Nash says the long-term prospects for Air Canada and the airline industry in general will be complicated by impending emissions pricing.
“Obviously, air travel isn’t going anywhere, but if we are serious about climate change — and air travel is a major causal factor in that — I expect the price of air travel to go up in my lifetime. I don’t think flights are going to stay this cheap,” he says. “And if we are in a situation where they’ll need to pay any form of carbon pricing for those emissions, then long-term that would have a negative impact on their profitability.”
“I think that short-term, sure, there might be a little bit of money made [with Air Canada] but for long-term investors, if the plan is to buy and hold, I wouldn’t touch this one,” he says.
Transat has faced difficulties in recent years, posting a net loss of $24.5 million last year as it faced growing competition in the holiday travel sector. News broke earlier this year that that the company was looking for potential suitors, including Onex Corp, which on Monday announced its friendly offer to buy Air Canada’s main competitor WestJet for $5 billion.