Transat’s Eustache: “No Future” Without Transformation

Open Jaw
by Bruce Parkinson

Transat needs to transform. But when you’re one of the world’s largest vertically integrated travel companies, that’s easier said than done.

Stung, as expected, by a massive 14% increase in transatlantic seats this summer, which cut into both loads and selling prices, Transat saw its net income decline by 28% and its adjusted earnings sink by 90%. Last year’s summer was strong, but 2016’s results are still a tough pill to swallow.

A bright spot was the company’s 35% interest in Ocean Hotels, which earned $2.5 million in profit – about a quarter of Q3’s total net income. The Ocean investment also brought in a $9.1 million dividend during the quarter and now has a book value of just under $100 million.

CEO Jean-Marc Eustache wants to see more of that. Acquiring hospitality assets in Mexico and the Caribbean has been a stated priority for close to a year. So has building a stronger distribution network in the U.S. through a tour operator acquisition. Both strategies have been a focus and source of success for rival Sunwing.

But as Eustache laments, these things take time. It’s been a year since Transat announced its intention to sell its France and Greece operations. It was May when TUI made a firm offer of about $80 million. EU approval for the deal is expected, but may not come until the end of 2016.

And Transat will need funds to make a significant move into hotels. The industry is in a profitable period, so prices are high. Transat knows it won’t be getting a steal, but it won’t buy at any price. The company has somewhere in the neighbourhood of $150 million to invest without having to seek alternative financing.

While there’s still nothing to announce on that front, Eustache says Transat has been intensely pursuing a hotel investment, which he says is a much higher priority “by far” than acquiring a U.S. operation.

Asked by a financial analyst how soon Transat would release details should the hotel investment search progress, Eustache was effusive. “You don’t know how much I will be happy to tell you the deal, that’s the deal, and we are on it. For me it’s a frustration not being able to talk about it, but I cannot talk more than that.”

Responding to a question about increasing direct business through online sales, Transat CFO Denis Petrin said Transat wants to “offer our products in every channel for the customers to decide where they want to buy.” But Eustache was quick to note that most online sales are for air-only product, and travel agents will continue to be the primary channel for packages. In fact, he sees continued growth for retailers.

“It seems that since a year now, a lot of the market is going back to the travel agency, especially the travel agent at home because that’s another channel that is growing a lot, especially in the States, and is coming to Canada. So for us, this channel of distribution is more than important, it’s very important and it’s something that we will continue to work with very closely.”

The tough transatlantic summer will spur some changes at TS for next year, executives said. One-flight per week routes are likely to be cut, domestic capacity – a strong segment this summer -- will be significantly increased, and scheduling changes will result in more regular arrival and departure times on major European routes. TS will also be seeking interline partners to feed more traffic.

Eustache says all the players suffered on transatlantic routes this summer, and he hopes some lessons were learned. “Here in Canada, I don’t know what happened, somebody took too much wine or I don’t know what. The increase in capacity that we have seen this year has been too abrupt for such a market to absorb rapidly. Therefore, despite the price simulation put in place to convince more people to travel, the excess capacity has led to reduced load factors.

“It is not the 1st time in the history of the company that you are seeing that. It is necessary to take a longer-term view on the situation. We believe that our competitive positioning remains strong, thanks to our many advantages. We are the lowest cost producer on the transatlantic. We are well distributed on both sides of the Atlantic.”

As the summer season transitions into winter sun, there’s no doubt the battle will continue. This year’s transatlantic seat war is being followed by a major boost in sun capacity for Air Canada Vacations this winter. That operator is promising its largest-ever sun program, with at least 17% more seats. Eustache says other players are limiting increases, but it’s not likely to be a seller’s market.

Still, Eustache says Transat will soldier on in a hostile marketplace, while it seeks opportunities in areas of the business with higher margins: “If we have to fight another year like this year, we will do it. And if we have to fight another year after, we are still going to do it.”

The long-time CEO says that while transformational change may be taking a frustrating amount of time, it is inevitable and imperative.

Transat will not be what it is today. There’s no future in Transat if we stay like we were and we’re going to completely change the company.”

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