Transat Q1 Results Underscore The Need For Transformative Change
By Bruce Parkinson
With each quarter that passes, Transat CEO Jean-Marc Eustache sounds more and more determined to shift the company away from its traditional tour operator role. And the reasons why become more apparent with each set of quarterly results.
For the first quarter of 2017, ended 31JAN, Transat saw its revenue drop by 5% as it posted a $32.1 million net loss. The company’s share price has lost nearly a third of its value over the past year, and currency woes combined with fierce competition in both sun and transatlantic markets have offset the company’s determined and successful efforts to reduce costs.
The increased cost of fuel and U.S. dollars represented a $17 million headwind for Transat during the quarter. That works out to about $44 per package passenger. About half of that was recovered through higher prices, but the rest of it, according to CFO Denis Pétrin, “offset all the efficiencies gained in the business.”
The disappointing numbers were described as “expected” by Transat, and Pétrin acknowledged as much: “All in all there were no surprises for us in this quarter.”
The need to change is clear, but Eustache says it takes time.
It’s taking time, for example, for the company to make a final decision on whether to sell its 35% share in Ocean Hotels – a bright spot in the quarterly results – or acquire 100% of the hotel group.
It sounded very much on yesterday’s earnings call with financial advisors that Transat is determined to become the sole owner and begin ramping up the hotel aspect of its business. Executives says a decision can be expected shortly.
When asked if Transat is looking at other opportunities for hotel acquisitions in the Caribbean and Mexico, Pétrin had this response: “Ocean is our priority. We are dedicating all our resources for this one – 99% of our energy is on Ocean right now.”
The 35% stake in Ocean delivered $3.6 million in profit to Transat in the quarter, and the book value of the asset is just under $100 million. With hotel prices at a high, it makes sense for Transat to complete the Ocean deal and grow from the current base of 3,600 owned or managed rooms to a planned 5,600 by 2019.
Asked by an analyst what Transat can do to bring its critical winter season back to profitability, Eustache was unequivocal about his intentions.
“We will be more and more a hotel company, more and more an airline company. We will sell more and more direct three to five years from now. We will downsize the way we distribute the product.”
Should the deal with Ocean come to fruition, Transat says it expects to add new properties “every 12-18 months.” The ultimate goal, Pétrin says, is to control 15-25% of the hotel rooms it sells.
Looking ahead to Q2, Transat says results could be “slightly superior” to last year, when a number of factors including Zika virus fears and a threatened pilot strike impacted results. After that, the focus is on the summer transatlantic season, where Transat will continue to see fierce competition.
Overall capacity on transatlantic routes is up 4% this year – a relief after a double-digit jump in 2016, and Air Transat capacity is up 6%. So far, about 33% of the seats have been sold, but fares are down nearly 5% year-over-year.
“We are behind on transatlantic but signs have been positive in recent weeks,” Pétrin says.
After the earnings call and Transat’s Annual General Meeting, CEO Eustache told Canadian Press that Transat has weathered worse conditions during its 30-year history, and will get through this phase too.
"We're going to be there and we're going to transform the company like we said, no problem."