MONTREAL — Transat A.T. Inc. posted revenues of $612.1 million for the quarter ended Oct. 31, compared with $634 million for the same quarter last year, a decrease of $21.9 million, or 3.5%.
Transat recorded adjusted operating income of $46.5 million, compared with $70.8 million in 2015. Adjusted net income was $24.2 million compared with $44.6 million in 2015.
“At the end of the previous quarter, we forecasted that we would have difficulty achieving another record summer in 2016, given the drastic increase in overall supply compared with the year before,” said Transat President and CEO Jean-Marc Eustache. “Our prediction proved to be correct. We’ve had a satisfactory summer season per se, but it was not enough to offset the especially challenging winter, with the end result that we are finishing the year with a slight adjusted net loss, equivalent to about 0.5% of sales.”
Eustache attributed Transat’s $21.9 million decrease in revenue mainly to lower load factors (-3.6%), and lower average selling prices (-8.9%) on the transatlantic market. The number of passengers increased by 3.4%. Transat increased capacity in this market by 7.4% compared with 2015, while overall capacity increased nearly 14%.
On the sun destinations market, average selling prices increased by 3.7%. Transat increased capacity by 5.0% compared with 2015, and the number of passengers rose by 2.2%.
The drop in operating income stemmed mainly from the lower load factors and lower average selling prices, he added, which lower fuel costs and continuing cost-reduction efforts could not fully offset. The decrease in fuel costs, combined with the decline in value of the Canadian dollar against its U.S. counterpart, led to a decrease in operating costs of $12.9 million on the transatlantic market.
Fears prompted by the Zika virus, the threat of strike action by Air Transat pilots, a decrease in demand for travel from Western Canada, and increased competition all affected Transat’s winter-season performance. The decline in value of the Canadian dollar against the U.S. currency, combined with lower fuel costs, resulted in a $49 million increase in operating costs for sun destination packages, nearly 60% of which was offset by Transat’s cost-reduction efforts and by higher average selling prices. The combination of these factors prevented any improvement in profitability, according to the company.
Eustache said Transat has taken “major steps forward” in the implementation of its strategic plan”, specifically regarding the simplification of its distribution structure in Europe and its Web presence.
In October 2016 European anti-trust authorities approved the transaction for the sale of Transat’s France- and Greece-based tour-operating business units (Transat France and Tourgreece, respectively) to multinational tourism company TUI AG.
“We are now ready to begin the next phase, namely, make an acquisition in the hotel market in the south, before, in a third phase, setting our sights on the U.S. The year just concluded has been challenging for our bottom line, but particularly fruitful when it came to making progress on our transformation plan.”
Transat is in discussions with its partner, H10 Hotels, with regard to its 35% interest in Ocean Hotels. During the next months, Transat plans to evaluate the preferred course of action: increasing its stake to 100%, or selling it to its partner, who currently holds the remaining 65% share, to free up funds for other investments. Transat’s goal is to have full control of its hotel unit and the company says it expects to be in a position to make its decision public in the coming months.
Ocean Hotels directly owns three hotels with a total of 1,600 rooms, and manages another four in Cuba comprising 2,000 rooms. The goal of the venture is to reach 5,600 rooms by 2019 through a mix of owned and operated hotels.
As set forth in the plan announced during the first quarter of 2015, Transat is continuing its cost-reduction and margin-improvement initiatives, which target savings of at least $100 million over three years. The main initiatives that contributed to reaching the objective of $45 million in 2015 were Air Transat’s insourcing of narrow-body aircraft and implementation of a flexible fleet.
The principal factors leading to achievement of the $30 million for 2016 were the continued application of the cost-reduction program at Air Transat, optimization of hotel costs, and growth in ancillary revenues. Transat says it plans to save at least another $25 million in 2017.
Looking ahead to the next six months, on the sun destinations market outbound from Canada Transat’s capacity is 3% lower than last year. To date, 50% of that capacity has been sold, bookings are ahead by 2.2%, and load factors are higher by 3.3%.
The impact of the weakened Canadian dollar, added to the increase in fuel costs, will be a 3% increase in operating costs if the dollar and fuel costs remain at their current level. Currently margins are lower by 1.5% compared with last year at the same date.
On the transatlantic market Transat’s capacity is up 8% compared to last winter. To date, 49% of that capacity has been sold, bookings are ahead by 10%, load factors are higher by 0.8%, and selling prices are lower by 4.4%.
Higher fuel costs, in combination with currency variations, will result in an increase in operating costs of 2.7% if the dollar remains at its current level against the U.S. dollar, the euro and the pound, and if fuel prices remain stable. Margins are currently lower by 7.8% compared with last year at the same date.