After Full-Year Loss, Transat Setting Its Sights On Hotels

Open Jaw
by Bruce Parkinson

Transat remains convinced that ownership of hotels in Mexico and the Caribbean is essential to its future profitability. But the price of entry is daunting.

The company has dipped its toes into the water with a 35% interest in Ocean Hotels, which currently owns 3 resorts in Mexico and the D.R. with a total of 1,600 rooms, and manages another 4 in Cuba comprising 2,000 rooms. The goal of the venture is to reach 5,600 rooms by 2019 through a mix of owned and operated properties.

By March 2017, Transat CEO Jean-Marc Eustache told listeners to a Q4 earnings call, the company will make a decision to either acquire the remaining 65% of Ocean, or sell its share to the current majority owner and seek a different hotel play. Either way, achieving the higher margins currently being earned on the hospitality side of the business remains priority #1.

“Controlling the product at destination is very important, both in terms of margin and the customer experience,” Eustache said. “If we are to sell the same product as everyone, it will only be based on price.”

Transat rival Sunwing has demonstrated the value of that approach. Its Blue Diamond Resorts have expanded quickly to become among the Caribbean’s fastest growing resort chains, with a 23 property, 6 country portfolio exceeding 13,000 rooms.

The challenge is that asking prices for hotel ventures are very high. Eustache says Transat had a good look at U.S.-based Apple Leisure Group, which was sold this week to a private equity company. With tour operator Apple Vacation and surging AMResorts among its holdings, Apple looked like a perfect fit for Transat’s aspirations, which include stronger U.S. distribution.

“Yes we looked at it. But they were looking for USD 1.5 billion for the entire group and we decided the price was too high for us to pursue.”

Eustache also mentioned Playa Resorts, which also sold last week in preparation for an IPO in the New Year. It currently owns a 13 resort, 6,100 room portfolio (including the Hyatt Ziva and Zilara brands) and is valued at about USD 1.75 billion. At those prices, Ocean might be a more affordable alternative that can be a foundation for future Transat growth.

Change is essential, Eustache said, as the company posted a $41.7 million loss for the financial year ended 31OCT. The loss, on $2.9 billion in revenue, came despite Transat aggressively cutting costs and streamlining its fleet of TS aircraft in the past 3 yr.

In the tour operation business there always seems to be something that can jump up and bite you in unexpected places, and Transat has seen its share of late – ranging from pilot strike threats during a key sales period going into 2016, to terror attacks, a declining CAD and the deterrent effect of the Zika virus.

This past summer it was a flood of new seats on its bread-and-butter summer transatlantic routes that stung Transat. Load factors were down 3.6% and average selling prices plunged 8.9%.

“At the end of the previous quarter, we forecasted that we would have difficulty achieving another record summer in 2016, given the drastic increase in overall supply compared with the year before,” said Eustache. “Our prediction proved to be correct. We’ve had a satisfactory summer season per se, but it was not enough to offset the especially challenging winter, with the end result that we are finishing the year with a slight adjusted net loss, equivalent to about 0.5% of sales.”

What will this winter bring? It’s still early to say, though Transat says it has already sold 50% of the seats in its winter sun program. Capacity is 3% lower than last year, bookings are ahead by 2.2% and load factors are higher by 3.3%.

“It’s very tough to say what we could have in front of us this winter,” Eustache told financial analysts on the call. That’s a given these days in a highly competitive environment prone to external shocks, but frigid temperatures and wintry conditions across much of Canada in mid-December may help push more Canadians to plan a trip to the sun.

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