Transat A.T. Inc. releases financial results for the first quarter of 2014

Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada’s holiday travel leader, posted revenues of $847.2 million for the quarter ended Jan. 31, 2014, compared with $805.7 million for the same period in 2013, an increase of $41.5 million, or 5.2 per cent. The Corporation recorded an operating loss before amortization and depreciation of $23.8 million, compared with $21.0 million in 2013, and a net loss of $25.6 million ($0.67 per share on a diluted basis), compared with a net loss of $15.1 million ($0.39 per share on a diluted basis) in 2013. The decline in value of Canadian dollar alone resulted in increase in operating expenses of $14 million. Before non-operating items, Transat reported an adjusted after-tax loss of $23.3 million in 2014 ($0.60 per share on a diluted basis), compared with $21.6 million ($0.56 per share on a diluted basis) in 2013. 

“A substantial portion of the loss over this quarter is attributable to the sudden and rapid drop in the value of the Canadian dollar,” said Jean-Marc Eustache, president and chief executive officer of Transat, adding: “This resulted in a significant increase in our operating expenses, which was offset only partially by higher selling prices and by our hedging program. That situation alone is what keeps us from posting improved results over last year at this time, both for the quarter and for the winter. However, our cost-control and margin-improvement program, which includes internalization of our narrow-body fleet, is unfolding as planned and delivering the expected results. We are on the right course.” 

The Corporation posted revenues of $847.2 million, compared with $805.7 million for the same period in 2013, and an operating loss before amortization and depreciation of $23.8 million, compared with $21.0 million in 2013. The increase in revenues was attributable mainly to higher average selling prices and the strengthening of the euro and the pound against the Canadian dollar. The operating loss before amortization and depreciation worsened mainly because of the recent rapid depreciation of the Canadian dollar against its U.S. counterpart. 

Revenues of North American business units, which are generated by sales in Canada and abroad, rose by $31.5 million (4.6 per cent) compared with the same period in 2013. The increase stemmed from the increase in average selling prices, while the number of travellers decreased by 0.8 per cent. North American business operations resulted in an operating loss of $25.0 million, compared with one of $16.3 million in 2013. The higher operating loss is mainly attributable to the recent rapid depreciation of the Canadian dollar against the U.S. currency, which resulted in an increase in operating expenses. The combined effect of increased selling prices plus cost-control initiatives was not sufficient to offset the effect of those expense increases. 

Revenues of European business units, which are generated by sales in Europe and in Canada, increased by $10.0 million (8.7 per cent) over 2013, owing to the strong performances of the euro and the pound against the Canadian dollar. Measured in local currencies, those business units’ revenues declined, following the Corporation’s decision to reduce capacity. European operations resulted in a loss before amortization and depreciation of $8.6 million, compared with one of $13.7 million in 2013. 

As at Jan. 31, 2014, the Corporation’s free cash totalled $359.6 million, compared with $247.9 million at the same date in 2013. The working capital ratio was 1.07, against 1.02, and deposits from customers for future travel amounted to $621.6 million, compared with $592.0 million a year earlier. Off-balance-sheet agreements stood at $657.0 million as at Jan. 31, 2014, compared with $655.8 million as at Oct. 31, 2013, the increase being attributable to the depreciation of the Canadian dollar against the U.S. dollar, partially offset by payments made during the 12-month period. 

On the Sun destinations market, Transat’s capacity is approximately two per cent lower than that commercialized last year. To date, 70 per cent of that capacity has been sold, load factors are lower by two per cent, and selling prices are higher by four per cent compared with those recorded last year at the same date. 

In France, where winter corresponds to low season, compared to last year at this time medium-haul bookings are higher by 16 per cent, long-haul bookings are down by four per cent, and selling prices are similar. 

On the transatlantic market, also in low season, Transat’s capacity is six per cent lower than that commercialized last winter. To date, 67 per cent of that capacity has been sold, load factors are lower by five per cent, and selling prices are higher by two per cent. 

Outlook for winter – The Sun destinations market out of Canada accounts for a substantial portion of Transat’s business during the winter season, and on that market, margins are particularly slim and volatile. Owing to the rapid recent decline in the value of the Canadian dollar, the Corporation expects that its second-quarter results will be inferior to those posted for the corresponding quarter last year. 

Drop of Canadian dollar – The weakening dollar by itself led to an increase in operating expenses of 2.7 per cent in the first quarter for sun destinations, and of 3.4 per cent in the second quarter for bookings made to date. If the dollar remains at its current value, the increase in operating expenses for the second quarter overall resulting from the decline in the dollar’s value compared with the previous year will be 3.7 per cent. 

Summer 2014 – With regard to summer 2014, while it is too soon to draw firm conclusions given that only 27 per cent of seats have been sold, Transat’s capacity on the transatlantic market is one per cent higher than in 2013. Load factors are similar and prices are higher by five per cent. The weakened Canadian dollar will mean an increase in operating expenses this summer, estimated to be six per cent if the dollar remains at its current value against the US dollar, the euro and the pound. 

The Corporation is continuing with implementation of the initiatives provided for in its return-to-profitability plan, including measures to reduce operating costs and changes to its systems and processes. In April 2013, Transat announced its decision to internalize narrow-body medium-haul aircraft (Boeing 737-800s) for its Sun destination routes outbound from Canada, starting in May 2014. The various measures (cost-reduction initiatives, additional revenues and efficiency gains) had, as expected, a favourable impact of $20 million on the margin in 2012 and one of $15 million in 2013. The Corporation expects another $20 million in 2014, as well as in 2015, when internalization of the narrow-body fleet will produce its full benefits. 

Hedging – The Corporation records any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk in the statement of income. For the first quarter of 2014, this translates into a $3.2 million non-cash loss ($2.4 million after income taxes), compared with an $8.8 million gain ($6.4 million after income taxes) in 2013. 

The Corporation also uses hedging instruments to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. Accordingly, under applicable accounting standards, any fluctuations resulting from mark-to-market adjustments of these instruments are recorded in the balance sheet and statement of comprehensive income rather than in the statement of income. For the first quarter of 2014, Transat recorded a $12.1 million gain ($8.9 million after income taxes) on these foreign-currency hedging instruments, compared with a loss of $0.9 million ($0.6 million after income taxes) for the corresponding quarter in 2013. 

Summary of non-operational items – Before non-operating items, Transat posted an adjusted after-tax loss of $23.3 million for the first quarter of 2014 ($0.60 per share on a diluted basis) compared with one of $21.6 million in 2013 ($0.56 per share on a diluted basis). 

Transat A.T. Inc. is an integrated international tour operator with more than 60 destination countries and that distributes products in over 50 countries. A holiday travel specialist, Transat operates mainly in Canada and Europe, as well as in the Caribbean, Mexico and the Mediterranean Basin. Montreal-based Transat is also active in air transportation, accommodation, destination services and distribution.