Tough Winter For Transat

Open Jaw
by Bruce Parkinson

This tour operating business is for the birds. 

No, Transat executives didn't actually say that during the company's Q1 earnings call with analysts. But they made it pretty clear that even by the standards of a business frequently buffeted by external forces, this winter has been a nasty one. 

Things were going well until mid-December, said CFO Denis Pétrin, when sales took a tumble with bookings down as much as 30% some days. “Bookings were ahead, margins were similar, we had more people on smaller planes – we were anticipating an improvement of our winter results,” Pétrin said. But then the roof fell in.

It wasn't one thing, it was a confluence, and competitors felt it too. Warm weather in much of Canada, gloomy economic news, a stagnating dollar. Then came the spectre of the Zika virus. Finally, in an added kick just for Transat, its pilots' union passed a strike vote that the press seized on because it could potentially have impacted March Break travel. The strike was settled, but damage was done.

Transat says that the weakening dollar alone cost the company $72 per package – or $55 million – about 2/3 of which was recovered through price increases. But that factor alone offset much of the gain the company made through an ongoing cost-reduction program.

The result of all these factors was a widened adjusted Q1 loss of $37.3 million or $1 per share, which missed analyst expectations. Q2 doesn’t look much better, though Transat has been able to cut some losses by trimming late winter season capacity, as have its rivals, which are experiencing the same conditions.

The jury is still out on summer, where Transat has enjoyed recent success, posting its best summer results in the nearly 30 yr. history of the company over the past 3 years.

Transatlantic capacity for summer is up a startling 16% across the market, with Transat itself boosting seats by 8%. CEO Jean-Marc Eustache says he’s confident about most of the program, but he acknowledges that the very important London route could be a bloodbath, with WS entering the fray for the 1st time.

Eustache says transatlantic flight prices are already lower than last year, especially away from the peak summer weeks, and acknowledged that cutting capacity is an option. But he also vowed not to give up market share easily – to new entrants and established competitors alike.

“We’re not ready to cancel right now and let the other guys come in. We’ve been there 29 years. We’re not ready to let this go easily. The new guys will have to work hard. The big guys have to be ready to have a fight if necessary.”

Eustache expressed frustration about what he called “a very undisciplined” Canadian industry.

“If business is good, everybody adds capacity. It’s always like that. One is smarter than the other. To be in this business you have to be very strong or very crazy.”

One could argue that it’s especially tough to navigate these waters as a publicly traded company, with analysts questioning every move and lack of predictability a negative. “If you want to know what’s going to happen in the future, good luck – and please tell me,” said Eustache.

That unpredictability is the main driver behind an overall shift in strategy for Transat, which it hopes will leave it less vulnerable to vagaries.

To that end, Transat has put its tour operations in France and Greece up for sale, and expects to have a deal in place – if it can get the price it wants – by June. Funds from that sale will be used for diversification, likely through a partnership with or acquisition of a hotel company. Transat is already a 35% owner of the Ocean hotel chain in collaboration with H10. The overriding goal is to be less dependent on the ever-tricky ITC business.

“We really want to be a North American business. And we want to focus on 3 things – the hotels, the airline and distribution, which includes the tour side of the business. We’re going to be a different animal. We’re going to change the business,” Eustache vowed.

Leave a Comment...

(will not be published)