Opinion: Sunwing deal only first as hospitality sector faces consolidation pressures

Entrepreneur Stephen Hunter took tough steps to ensure Sunwing Airlines and Sunwing Vacations survive the pandemic, cutting staff and borrowing money to ensure the business would still be around when restrictions were lifted and that Canadians could head south again in the winter.

However, the general manager of the family business Sunwing knew that the invoices would eventually come due.

At the beginning of this year, the tour operator had to repay $327 million in loans from the federal government. At the same time, vacation travel was taking off and Sunwing had to spend money on leasing planes and rehiring pilots and flight attendants. Mr Hunter said the conflicting pressures of paying down debt while needing to invest more capital in expanding the business prompted Sunwing to review the WestJet Group’s pre-pandemic overtures and agree to sell the company that his family started in 2002.

“We got to the point in the last few years where we couldn’t grow as much as we wanted to,” Hunter said in an interview. He said Sunwing was looking at options to deal with the seasonality of its business – its fleet is shrinking from 40 planes in winter to 15 in summer – before the pandemic put the company in debt. He said leveraging the market reach and financial strength of WestJet and its parent company Onex Corp. “helps us to overcome this difficulty”.

Sunwing’s financial challenges mirror what is happening to owners of hotels, restaurants, gyms, ski resorts and all sorts of other private businesses impacted by the pandemic. If they survived the past two years, they did so by cutting costs, burning savings and borrowing money.

Today, these entrepreneurs – the hospitality industry is dominated by family businesses – face the challenge of rebuilding their operations while paying down debt.

Sunwing owners are lucky to have a deep-pocketed buyer. Other companies facing the same headwinds are going bankrupt. Sky Regional Airlines Inc., based in Toronto, closed its doors last March, ending a decade of operation.

Mr. Hunter’s family and Sunwing’s minority shareholder, TUI Group, a German tour operator with a 49% stake, will take shares of WestJet in exchange for their business. The Hunter family and TUI will continue to own a collection of 30 hotels in the tropics.

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Sunwing is privately owned, but disclosed that it borrowed $227.1 million under a federal government loan program and drew an additional $99.6 million from a credit facility. credit. It was expensive capital. The debt carried an interest rate of 5%, and Mr Hunter said that as a private company, Sunwing was also obligated to pay an additional 6% for credit insurance.

“With or without this deal, we were looking to repay that funding,” he said. “It will prove to be a good investment for Canadian taxpayers.

WestJet is unique among Canadian airlines for refusing government funding during the pandemic, a move that Hunter says has made the Calgary-based airline a more attractive partner. WestJet and Sunwing declined to comment on the value of the transaction.

Toronto-based Onex acquired WestJet in 2019 for $5 billion, including assumed debt. Onex’s financial results, released last Friday, show that it funded the takeover with $980 million in equity. Of that total, US$196 million came from Onex, with the rest coming from its institutional investor clients.

Onex’s results show that, despite the pandemic, the company has received US$3 million in cash distributions from WestJet over the past two years.

WestJet chief executive Alexis von Hoensbroech, who took the top job less than two weeks ago after serving as chief executive of Austrian Airlines, says merging the two companies would be a victory for consumers and would mean more jobs in Canada,” as you combine Sunwing, a large tour operator with a small airline, with WestJet, a large airline that is a small tour operator.

Once Sunwing joins the fold, WestJet plans to expand a travel business focused on Florida, the Caribbean and Mexico to destinations the Calgary-based airline already serves, such as Arizona, California, Hawaii and the United States. ‘Europe. WestJet’s advisers on the transaction are investment bank Barclays and law firm Goodmans LLP.

The takeover requires regulatory approval — a process that helped derail Air Canada’s proposed acquisition of Transat AT Inc. last April — and is expected to close by the end of the year.

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