Transat feels impact from heightened European capacity

Transat feels impact from heightened European capacity

MONTREAL — Moves by Canada’s two largest airlines to expand their number of flights to Europe will put the squeeze this summer on Transat AT, the Montreal-based tour operator said Thursday.

The company said a 15 per cent increase in market capacity and fears of terrorist attacks are forcing it to lower prices to fill seats.

“Next summer will be tougher,” CEO Jean-Marc Eustache said during a conference call after Transat (TSX:TRZ) reported its second-quarter results.

“We’ll still make money but we’ll make less money.”

London is ground zero of the European battle as Air Canada and WestJet add 200,000 seats or about 20 per cent capacity with their launch of service to Gatwick Airport. Transat is increasing its capacity by about 7,000 seats, or five per cent.

“The U.K. market is really stressed with overcapacity,” Eustache said. “If you look at the prices on the Internet, you will see that the prices are very low, even in the peak season.”

International summer airfares from Canada are down nearly 16 per cent compared to last year, while domestic fares are down five per cent, according to a consumer airfare index by airfare prediction app Hopper.

“Summer flight prices are down due to increased competition, decreased jet fuel prices and airlines moving into branded, unbundled ticketing with lower base fares and optional fees such as checked bags,” said chief data scientist Patrick Surry.

Transat said prices on European bookings are down 6.3 per cent from the same time last year. Summer prices to sun destinations are up 1.8 per cent.

Heightened competition, a dip in demand from Western Canada, fears about the Zika virus and a threatened pilot strike resulted in a winter “best forgotten,” Eustache said.

Transat lost $25 million in its fiscal second quarter and $86 million during the winter after earning $25 million and $40 million respectively a year earlier.

The depreciation of Canada’s dollar against the American currency increased operating costs on its sun destination travel packages by $25 million in the quarter and $49 million for the winter, even after factoring in lower fuel prices.

Transat said higher average selling prices were only partially able to offset the impact of the currency decline.

Mona Nazir of Laurentian Bank Securities said Transat fared relatively well this winter in a competitive market.

“Sunwing, Air Canada and Thomas Cook all pointed to winter challenges with increased competition, overcapacity and pricing pressures which were augmented by qualitative headwinds including Zika virus, terror fears and warmer weather,” she wrote in a report.

Transat is trying to absorb the blows by cutting costs and diversifying its operations. It said it is looking to partner with other tour operators to fly to new destinations, add flights within Canada, increase its hotel portfolio in sun destinations and acquire a U.S. travel distribution company.

The venture could see Air Transat planes being used to fly Americans to sun destinations from U.S. airports, the company said.

“Transat will be a completely different animal,” Eustache said. “It will not look like it is today.”