In Tough: Finding Path To Profit Imperative For Transat
Bruce Parkinson, Open Jaw
Jean-Marc Eustache and Annick Guérard
Transat says the cost of fuel rose so quickly this year that it was unable to sufficiently raise fares to compensate. The result was the worst financial performance in a decade in its normally strong third quarter.
The tour operator and airline badly missed analyst expectations, swinging to a $4 million loss from a profit of $26.6 million in Q3 2017. The stock market reacted, with Transat’s share price dropping nearly 13% before recovering to a 6.5% decline by day’s end.
“The fuel increases happened very suddenly in a short time period. In those circumstances, often we are not able to pass those increases to consumers,” said COO Annick Guerard in a conference call with analysts yesterday.
It’s another frustrating result for the vertically-integrated company, which has successfully taken tens of millions of costs out, restructured operations and significantly improved the fleet makeup and utilization of Air Transat in recent years. And it’s another reminder that more changes are needed before Transat can achieve its goal of consistent profitability.
The disappointing results could be a harbinger of more bad news to come. According to CEO Jean-Marc Eustache, if Transat is going to be profitable given its current makeup, that money will be made in the summer months.
“We think that in the winter, the best thing that we will do will be around break-even,” Eustache told investment analysts on the Q3 earnings call. And with executives warning that Q4 will be weaker than last year, short-term prospects aren’t great.
“We are clearly not satisfied with these results,” said CFO Denis Pétrin. “Future pricing will reflect higher costs, but it takes some time.”
As well as soaring fuel costs, Transat is fighting it out with a growing group of competitors on transatlantic routes, including low-cost long-haul airlines like Iceland’s WOW Air. So while consumer demand for summer transatlantic travel remains strong, the pricing landscape is more difficult – similar to the annual battlefield of the Canadian winter sun market.
“Our prices are aligned with the competition,” Petrin added. “I’d be surprised if they weren’t seeing the same impacts.”
But when you’re a publicly traded company, it’s all about the results, every three months. And Transat knows it needs to do better, even if Eustache remains positive about the company’s direction.
“We are still confident that we will meet our long-term targets, while Air Transat was just named the world’s best leisure airline by Skytrax,” Eustache said, adding some optimism to the call. He added that the company has opened its hotel division headquarters in Miami, and said an announcement regarding hotel investment should come before the end of the fiscal year on 31OCT.
The company has been talking about expansion into the sun market hotel business for several quarters now, but has yet to make substantive moves. Executives say it takes time, but investors have to be getting a little impatient, especially when Eustache suggests the company’s current business model won’t produce consistent profit.
“Hotels will make money. Tour operations and travel agencies are tools to sell. Look at TUI – it’s making money on hotels and cruise. It’s not making money as a tour operator.”
When asked by an analyst about the prospects of “more rational pricing” coming to the sun and transatlantic markets, CFO Pétrin was blunt: “We are not in an industry that has that characteristic.”
Bruce Parkinson Editor-in-Chief
An observer and analyst of the Canadian and international travel industries for over 25 years, Bruce uses the pre-dawn hours to prepare a daily news and information package to keep industry members up to date.