Consolidation among the rivals of Air Canada has started. Canada 3000, the country's second largest airline, has agreed to acquire Montreal-based Royal Aviation. The all-stock transaction, valued at C$84 million ($55 million), sees a full merger of the two mainly charter carriers, with the Royal name disappearing and a livery change complete by mid-year.

Royal's chief executive, Michel Leblanc, will become vice-chairman of Canada 3000 and oversee its domestic operations. Angus Kinnear, one of Canada 3000's founders, will remain chief executive and focus on international routes. Following the takeover, the combined airline will have about C$1 billion in annual revenue, 4,000 employees and an all-economy fleet of 35 jets.

Both airlines have charter backgrounds, but both moved into scheduled flights in response to Air Canada's takeover over of Canadian Airlines and public demand for more scheduled flight options. Canada 3000 operates mainly domestic long-haul and international flights; Royal has a stronger short-haul network in eastern Canada.

Because their routes have little overlap, government approval should be pro forma. Indeed, transport minister David Collenette, who must approve the deal, said after learning of it: "I'm encouraged by the way the competition is developing domestically."

Integration could produce a more balanced airline than when either was alone. But Canada 3000 will need to decide whether to stick with its all-economy niche and leave the full-service market to Air Canada and RootsAir, which plans to launch services this spring.

Some analysts applaud the takeover as a way for Canada 3000 to become a more credible rival to Air Canada. But Robert Milton, Air Canada's chief executive, perceives no threat. Instead, he notes "an incredible aggressive turf war" under way between Canada 3000, Royal, WestJet, and CanJet. Milton says: "I think the really interesting thing to watch will be to see how that part of the industry shakes out."

Source: Airline Business