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Clarification regarding Transat’s product strategy

2011-12-21

During the quarterly conference call on December 16, 2011, Transat spoke about a number of initiatives that it is taking to boost profitability. The company explained, for example, that it will be renewing efforts to differentiate its “sun” product, in hopes of being able to sell packages for a few dollars more. The explanations provided were misunderstood by some journalists, as evidenced in expressions such as “Transat turns its back on low prices” (“Transat tourne le dos aux bas prix”) and “Transat eyeing luxury products” (“Transat veut se tourner vers les produits luxueux”).

Over the years, the wintertime getaway to a sunny southern beach has become a must lifestyle option for millions of Canadians. The market is huge, demand is firm and highly resistant to economic downturns, and the competition is extremely fierce, in part because of the near-absence of entry barriers. As a result, a sizable majority of these products sell practically at cost, and profit margins are slim.

The challenge for tour operators has long been to market a holiday experience that consumers perceive as different and that offers added value, especially in this most popular of market segments. It is important to realize that, while an all-inclusive week in the sun can be had for as little as $700 per person (and even less), the true “deluxe” version of this type of product can cost $5,000 per person. Indeed, there are well-known major brands that specialize in high-end travel, a segment that might be defined as anything that sells for $3,500 and up per person per week. The mid-range segment, meanwhile, can be thought of as being in the range of $2,000 to $3,500.

Transat has always vied with its competitors for the biggest market segment in terms of passenger numbers; i.e., trips selling for roughly $1,000 to $1,500 per person per week—or less (far less, even!). That facet of the company’s strategy is not about to change.

What was explained on December 16 is that the company intends to ramp up efforts to differentiate its product—for example, through exclusive agreements with certain hotel chains or an enhanced in-flight experience—with a view to building greater customer loyalty, in a market where tour operators are currently competing mostly on price, with products that often are relatively devoid of distinguishing attractions. Over the medium term, as the senior executives explained, the tour operator’s margin, which is practically non-existent at the moment, could be nudged upward by $10 or $20 per package. In other words, the potential price variation is about 1%. This should therefore under no circumstances be construed as a shift toward luxury products, or a change in market segment, or even a willingness to substantially raise prices.