Transat Results: Dollar Drop Masks Efficiency Improvements

Open Jaw

Running a profitable tour operation in Canada is no easy task. It seems that no matter how efficient or innovative you are, a new threat or crisis is always waiting around the corner. Transat’s Q1 2016 results are a case in point.

The company, one of the world's largest integrated tourism businesses, posted revenues of $846.9 million for the quarter ended 31JAN, compared with $788.6 million in 2015, an increase of $58.3 million, or 7.4%.

Yet Transat recorded an adjusted operating loss of $40.6 million, vs. $35.8 million in 2015, and a net loss attributable to shareholders of $61.2 million vs. $64.3 million in 2015. Before non-operating items, Transat reported an adjusted net loss of $37.3 million for Q1 2016, compared with one of $32.4 million in 2015.

"Our organization is significantly more efficient, but the effects of our initiatives have been masked by the drop in value of the Canadian dollar," said Transat CEO Jean-Marc Eustache. "During the 1st quarter, the net increase in the cost of packaging all-inclusive sun destinations vacations was $24 million, and was only partly absorbed by consumers. The dollar, the Zika virus, the possibility of strike action by our pilots - which has now been averted - an economic slowdown and fairly mild weather conditions are all factors that make the current winter season challenging."

The revenue increase was generated primarily from an overall increase of 8.7% in the # of travellers and higher average selling prices for sun destinations, Transat's main market segment for the period.

Revenues of North American business units, generated by sales in Canada and abroad, increased by $42.4 million (6.2%) compared with the same period in 2015. The increase was due mainly to Transat’s decision to increase product supply by 9.6% on the sun destinations market and by 18.8% on the transatlantic market, which contributed to a 10.7% increase in the # of travellers on all markets combined.

During the quarter, the decline in value of the CAD against the USD, net of the decrease in fuel costs, resulted in an increase in operating costs of $24 million on sun destination routes, Transat says, with only 2/3 of that # offset by the higher average selling prices.

As of 31JAN, Transat’s free cash totalled $431.4 million, compared with $393.6 million at the same date in 2015.

Looking to Q2, Transat says its capacity for the 2nd quarter is 1% higher than that marketed last year. To date, 77% of that capacity has been sold, and load factors are 1.7% higher. However, the impact of the weakened CAD, net of the decline in fuel cost, will result in an increase in operating expenses of 5.1%, if the dollar and the cost of fuel remain at their current levels. Margins are currently lower by 2.4% than last year at this time.

On the transatlantic market, currently in low season, Transat's capacity is 18% greater than that offered last winter. To date, 72% of that capacity has been sold, load factors are 1.2% lower, and selling prices are lower by 4.7%. The impact of lower fuel cost will translate to a decrease in operating expenses of 7.4% if fuel cost remains at its current level.

Transat says that given the recent sharp decline in the value of the Canadian currency, consumer fears about the Zika virus and the risk of strike action by TS, now averted, Q2 results may be lower than those posted for the same quarter last winter.

The company says it is too soon to draw firm conclusions about summer 2016, coming off a strong season in summer 2015. Their capacity for the summer transatlantic market is up 8%.

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