Entrepreneur Stephen Hunter took tough steps to ensure Sunwing Airlines and Sunwing Vacations survived the pandemic, cutting staff and borrowing money to ensure the business would still be around when restrictions lifted and Canadians could once again head south in the winter.
However, the chief executive of family-owned Sunwing knew the bills would eventually come due.
As this year began, the tour operator faced repaying $327-million in federal government loans. At the same time, vacation travel was taking off and Sunwing needed to spend money to lease aircraft and rehire pilots and flight attendants. Mr. Hunter said the conflicting pressures of paying down debt while needing to put more capital into expanding the company prompted Sunwing to revisit pre-pandemic overtures from WestJet Group and agree to sell the business his family launched in 2002.
“We got to the point, in the last few years, where we couldn’t grow as much as we wanted to grow,” Mr. Hunter said in an interview. He said Sunwing was looking at options for dealing with the seasonality of its business – its fleet goes from 40 aircraft in the winter to 15 in the summer – before the pandemic burdened the company with debt. He said tapping the market reach and financial strength of WestJet and parent Onex Corp. “helps get us over this hump.”
Sunwing’s financial challenges mirror what is playing out for owners of hotels, restaurants, gyms, ski hills and all sorts of other privately held businesses hit by the pandemic. If they survived the past two years, they did so by slashing costs, burning through savings and borrowing money.
Now these entrepreneurs – the hospitality sector is dominated by family-owned businesses – face the challenge of rebuilding their operations while paying down debt.
Sunwing’s owners are in the fortunate position of having a deep-pocketed buyer. Other companies facing the same headwinds are going out of business. Toronto-based Sky Regional Airlines Inc. shut down last March, ending a decade-long run.
Mr. Hunter’s family and Sunwing minority shareholder TUI Group, a German tour operator with a 49-per-cent stake, will take WestJet shares in exchange for their business. The Hunter family and TUI will continue to own a collection of 30 hotels in the tropics.
Sunwing is a private company but did disclose that it borrowed $227.1-million under a federal government loan program and drew an additional $99.6-million from a credit facility. This was expensive capital. The debt carried a 5-per-cent interest rate, and Mr. Hunter said that, as a private company, Sunwing was also forced to pay an additional 6 per cent for credit insurance.
“With or without this deal, we were looking to repay that financing,” he said. “This will turn out to be a good investment for Canadian taxpayers.”
WetJet is unique among Canadian airlines for turning down government funding during the pandemic, a decision that Mr. Hunter said made the Calgary-based airline a more attractive partner. WestJet and Sunwing declined 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 it funded the takeover with US$980-million of equity. Of that total, US$196-million came from Onex, with the remainder coming from its institutional investor clients.
Onex’s results show that, despite the pandemic, the company 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 CEO at Austrian Airlines, said combining the two companies will be a win for consumers and will mean more jobs in Canada, “as you combine Sunwing, a large tour operator with a small airline, with WestJet, a large airline that’s a small tour operator.”
Once Sunwing joins the fold, WestJet plans to expand a tour business that was focused on Florida, the Caribbean and Mexico to destinations the Calgary-based airline already serves, such as Arizona, California, Hawaii and 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 scuttle 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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