Transat Vows To Become “Different Animal” In Search For Profitability

Open Jaw
by Bruce Parkinson

There are no deals to announce, but after “a winter best forgotten,” Transat is more convinced than ever that its plan to reduce reliance on the perpetually low-margin tour operator business is the right one.

On a 2nd quarter earnings call with financial analysts, Transat execs promised that the company will become “a different animal” in the months and years to come. “The first priority is to invest in hotels and expand our footprint. The return is very good on the hotel side of the business,” said CEO Jean-Marc Eustache. “The 2nd is to enter the U.S. market in a distribution role.”

Eustache says Transat’s focus will shift to becoming a supplier of hotel rooms and airline seats. In Canada it will use its retail and tour operations to sell those products, while south of the border it plans to acquire an OTA or tour operation to distribute air and hotel product.

The company says it is currently in talks with several hoteliers in the Mexico/Caribbean region, with an eye to purchasing properties. Eustache says the price to acquire hotels “won’t be cheap,” but will lead to better long-term returns. “The return on investment will be better with hotels, even if we pay a lot in the beginning. One competitor is doing very well with that,” he told analysts, in a nod to Sunwing Travel Group’s fast-growing hotel holdings.

Eustache says Air Transat’s role will change too, with new destinations – “even to different continents” – being planned for next summer. “We will become a supplier of rooms and seats. Distribution will be part of Transat, but not most of what we will be.”

With a deal in place to sell its France and Greece tour operations to TUI for close to $80 million likely to close by year-end, Transat is already beginning to shift its emphasis. A tough winter complicated by currency issues, Zika virus fears and a badly-timed strike threat from its pilots has underlined the urgency.

Summer is not looking much better. The transatlantic market is Transat’s bread-and-butter for summer, and the company has posted best-ever summer results in the past 3 years. This year it’s a bloodbath, especially on routes from Canada to London.

New WS routes from 5 Canadian cities to LGW have added some 150,000 seats to the market. AC is now flying to LGW too, adding 40,000 seats to the 600,000 it offers from Canada to LHR. Not surprisingly, the glut is causing extreme pricing pressure. “The U.K. market is really stressed with overcapacity,” said Eustache. “Prices are really low even in peak season.”

Transat says it has sold 62% of its transatlantic seats for summer, with average fares down 6.3% and loads down 3.3%. “Summer operating income will be inferior to last year if things remain the same,” said Transat CFO Denis Pétrin.

There was a palpable feeling of frustration on the earnings call, as Transat has worked very hard over the past few years to cut costs, create a more flexible and cost-efficient fleet for TS and build a solid balance sheet. It has been successful in all those endeavours, but the rewards have been elusive.

But with no debts on its balance sheet and $440 million in free cash as of 30APR, the company is in a position to make acquisitions and shift its focus. “Being more involved in products than distribution will assure better results,” Eustache said.

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