Transat A.T. Inc. – Results for third quarter 2011

Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada’s holiday travel leader, posted revenues of $937.0 million for the quarter ended July 31, 2011, compared with $867.3 million in 2010, an increase of $69.6 million, or 8.0%. The Corporation recorded a margin¹ of $14.6 million, compared with $53.9 million in 2010, and a net loss of $2.9 million ($0.08 per share on a diluted basis), compared with net income of $20.9 million ($0.55 per share on a diluted basis) in 2010. Before non-cash and non-operating items, Transat reported an adjusted after-tax income³ of $2.8 million ($0.07 per share on a diluted basis), compared with $26.8 million ($0.70 per share on a diluted basis) in 2010.

“These disappointing results are mainly attributable to fuel prices and market conditions, which had a negative impact on margins,” said President and Chief Executive Officer Jean-Marc Eustache.

Third quarter highlights

The Corporation’s third-quarter revenues increased by $69.6 million. The increase is attributable to a higher number of travellers on the transatlantic market, and to the decline of the Canadian dollar against the euro and pound sterling, which translated into an increase in the revenues of foreign business units when expressed in Canadian dollars. The Corporation recorded a margin¹ of $14.6 million, compared with $53.9 million in 2010.

Revenues of North American business units, which are generated by sales in Canada and abroad, increased by $80.3 million (14.8%) compared with the same period in 2010. The increase is attributable to the higher number of travellers, offset by lower selling prices stemming from a significant increase in capacity, as several carriers transferred seats to the transatlantic market in the wake of the March tsunami in Japan, as well as challenging economic conditions in Europe, leading to intense competition on the transatlantic market. The result was lower load factors and the Corporation’s inability to offset the 30% increase in fuel costs. As a result, North American business units recorded an operating loss of $16.0 million, compared with a margin of $26.6 million in 2010.

Revenues of European business units, which are generated by sales made in Europe and in Canada, decreased by $10.7 million (3.3%) over 2010. Except for Vacances Transat (France), revenues decreased during the quarter, mainly due to a decrease in the number of travellers and despite higher selling prices and the strengthening of European currencies. European operations generated a margin of $30.6 million for the quarter, compared with $27.4 million in 2010. The margin increase is mainly attributable to higher selling prices.

9-month period highlights

For the first nine months, the Corporation’s revenues increased by $127.9 million over 2010. This increase is attributable to more travellers on the sun destination and transatlantic markets. In addition, the decline of the Canadian dollar against the euro and pound sterling translated into an increase in the revenues of foreign business units when expressed in Canadian dollars. For the period, Transat recorded an increase of approximately 0.5% in the number of travellers, taking into account a reduction in the number of travellers from France in the wake of unrest in North Africa. The Corporation recorded a margin¹ of $9.1 million, compared with $49.7 million in 2010.

Revenues of North American business units increased by $120.8 million (5.8%) compared with the same period in 2010. The increase is attributable to a 6.0% increase in the number of travellers, while selling prices were slightly lower compared to the previous year. The Corporation was unable to increase its selling prices to offset the rise in fuel prices, and excess supply on the transatlantic market caused lower load factors, translating in pressure on margins. As a result, North American operations recorded an operating loss of $12.4 million, compared with a margin of $35.7 million in 2010.

Revenues of European business units increased by $7.1 million (1.1%) over 2010. Average selling prices were higher than for previous year, while numbers of travellers were inferior. European operations generated a margin of $21.5 million for the period, compared with $14.0 million in 2010.

Financial position

The Corporation’s cash totalled $307.6 million as at July 31, 2011, compared with $217.3 million as at July 31 2010. Working capital ratio was 1.02 as at July 31, 2011, compared to 1.01 a year earlier. Total balance sheet debt decreased by $14.2 million during the 12-month period, to $6.9 million. The net cash4 position improved by $104.6 million, from a net cash position of 196.2 million as at July 31, 2010 to $300.8 million as at July 31, 2011. These increases in cash are punctual, and are in part attributable to income generated in the last twelve months, as well as an increase in accounts payable as at July 31.

Off-balance-sheet agreements stood at $598.8 million as at July 31, 2011, compared with $542.6 million as at July 31, 2010, reflecting new leases for additional Airbus A330s as part of the Air Transat fleet renewal program.

Cash flows from operating activities decreased by $2.8 million during the quarter, from $48.2 million in 2010, to $45.4 million in 2011; and increased by $42.7 million during the first nine months, from $154.9 million in 2010 to $197.6 million in 2011.

Changes in management

“We have a healthy balance sheet, but the situation demands that we take action to return to profitability,” said Jean-Marc Eustache, President and Chief Executive Officer. “We have begun reviewing all operations and developing a plan focused mainly on reducing direct and operating costs, and on revisiting our approach to our IT systems. This is in addition to projects already under way aimed at optimizing the management of our airline assets and improving product strategies. Finally, we are immediately starting to implement changes to simplify our organizational structure in Canada, in order to accelerate decision-making and execution. With this in mind, by mutual agreement we are announcing today the departure of Chief Operating Officer Nelson Gentiletti, as well as Transat Tours Canada President Michael DiLollo. I want to take this opportunity to thank them both for the work they have accomplished at Transat all these years.”

Allen B. Graham, President and Chief Executive Officer of Air Transat, is appointed President, Transat Canada. Reporting to Mr. Eustache, he will oversee the operations of business units Air Transat, Transat Tours Canada, Transat Distribution Canada, Canadian Affair, Air Consultants Europe and Handlex. Transat France, Transat Discoveries, tripcentral.ca and Jonview Canada will report directly to the President and CEO. André De Montigny is appointed President, Transat International and will be responsible for Eleva Travel, Tourgreece, Trafic Tours, Turissimo and hotel operations, while remaining Vice-President, Business Development.

Outlook

The transatlantic market accounts for a very significant portion of Transat’s business in the summer. For the fourth quarter, the Corporation’s capacity is 12% higher than in 2010. Slightly more than 80% of capacity has been sold and load factors are 4% inferior to the previous year at the same date. Selling prices (including fuel surcharges) are similar to last year, despite an increase of approximately 30% of fuel prices, when expressed in Canadian dollars.

In France, bookings for medium-haul travel are slightly behind compared to last year, due to unrest in North Africa. However, the decrease in bookings for North African destinations, notably Tunisia and Egypt, is partially offset by the rise on other destinations. On long-haul travel, bookings are more than 10% higher than the prior year. Average selling prices are higher than last year.

Consequently, Transat expects the results of the fourth quarter to be inferior to the record results reported last year.