Transat A.T. Inc. – Results for second quarter 2010: Market conditions and volcanic activity erode margins

  • Revenues of $1,060.4 million, compared with $1,129.1 million in 2009, reflecting lower selling prices.
  • Margin1 of $8.2 million, compared with $39.1 million in 2009.
  • Net income of $6.2 million, compared with $42.2 million in 2009.
  • Adjusted after-tax loss3 of $2.7 million, compared with adjusted after-tax income of $20.7 million in 2009.
  • Costs of $4.0 million ($2.6 million after-tax) related to volcanic activity in Iceland.
Montreal, June 10, 2010

 

Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $1,060.4 million for the quarter ended April 30, 2010, compared with $1,129.1 million for the same period of 2009, a decline of $68.7 million, or 6.1%. The Corporation recorded a margin1 of $8.2 million, compared with $39.1 million in 2009, and net income of $6.2 million ($0.16 per share on a diluted basis), compared with $42.2 million ($1.27 per share on a diluted basis) in 2009. Before non-cash and non-operating items, Transat reported an adjusted after-tax loss3 of $2.7 million ($0.07 per share on a diluted basis) for the second quarter of 2010, compared with an adjusted after-tax income of $20.7 million ($0.62 per share on a diluted basis) in 2009.

“Both the quarter and the first six-month period have seen intense competition, which continues to squeeze margins and benefit the consumer. Our operating expenses are under control and our cost-reduction efforts have been successful,” said Jean-Marc Eustache, President and Chief Executive Officer. “In addition, we recorded unexpected costs of $4 million as a result of volcanic activity in Iceland.”

Second quarter highlights

The Corporation’s second quarter revenues declined by 6.1%, or $68.7 million. The decrease is attributable to lower selling prices, caused by intense competition, and the effect of a strong Canadian dollar against the euro and the pound sterling. As a percentage of revenues, the Corporation’s margin1 decreased from 3.5% in 2009 to 0.8% in 2010. The decrease stems from lower average selling prices, the result of overcapacity in the marketplace, mainly in Canada, partly offset by lower costs.

Revenues of the North American business units, which are generated by sales in Canada and abroad, decreased by $27.5 million, or 3.0%, compared with the same period in 2009. The decrease is attributable to a decline in average selling prices, partly offset by an increase in the number of travellers. North American business units posted a margin of 1.5%, compared with 4.2% in 2009. The decline in margin is mainly attributable to lower selling prices resulting from excess supply and intense competition in the marketplace, and the fact that Transat was unable to fully capitalize on the strength of the dollar against the US currency, due to the Corporation’s hedging transactions.

Revenues of European business units, which are generated by sales to customers in Europe and in Canada, decreased by $41.2 million (19.2%) in the second quarter compared with the same period in 2009, despite an increase in the number of travellers. The latter, the result of higher volumes at Canadian Affair and lower volumes in France, was insufficient to offset the effect of a strong Canadian dollar against the euro and the pound sterling, and lower selling prices. European operations reported an operating loss of $4.9 million, compared with a margin of $0.3 million in 2009. The decline in margin is also due to costs incurred by Transat following the volcanic activity in Iceland.

First six-month period highlights

Revenues for the first six-month period declined by $153.4 million. The decrease is attributable to lower selling prices, caused by intense competition, and the effect of a strong Canadian dollar against the euro and the pound sterling. As a percentage of revenues, the Corporation’s margin1 decreased from 1.5% in 2009 to an operating loss representing 0.2% of revenues in 2010. The decrease stems from lower average selling prices, the result of overcapacity in the marketplace, mainly in Canada, partly offset by lower costs.

Revenues of the North American business units, which are generated by sales in Canada and abroad, decreased by $110.1 million, or 6.7%, compared with the same period in 2009. The decrease is attributable to a decline in average selling prices, but also to a 1.1% decrease in the number of travellers, stemming from a reduction of capacity in the first quarter. For the first six-month period, Transat posted a margin of  0.6%, compared to 2.4% in 2009. The decline in margin is mainly attributable to lower selling prices resulting from excess supply and intense competition in the marketplace, and the fact that Transat was unable to fully capitalize on the strength of the dollar against the US currency, due to the Corporation’s hedging transactions.

Revenues of European business units, which are generated by sales to customers in Europe and in Canada, decreased by $43.3 million, or 12.3%, compared with the same period in 2009, despite an increase in the number of travellers. The latter, the result of higher volumes at Canadian Affair and lower volumes in France, was insufficient to offset the effect of a strong Canadian dollar against the euro and the pound sterling, and lower selling prices. European operations reported an operating loss of $13.4 million, compared with $9.5 million in 2009. The decline in margin is also due costs incurred by Transat following the volcanic activity in Iceland.

Volcanic activity in Iceland

During the quarter, the Corporation’s operations were partly disrupted by the volcanic activity in Iceland. The temporary shutdown of airspace over part of Europe caused flight cancellations and delays, and required Transat to modify its schedules and charter special flights. The resulting additional costs incurred in the second quarter amounted to nearly $4.0 million and are reported as direct costs.

Financial position

Cash and cash equivalents not held in trust stood at $207.0 million as of April 30, 2010, compared with $180.6 million as of October 31, 2009. Balance sheet debt amounted to $55.3 million as of April 30, 2010, or $55.5 million lower than at October 31, 2009.

Outlook for the summer of 2010

On the Canada-Europe market, Transat’s capacity is approximately 15% higher than for the summer of 2009. The Corporation’s load factor is slightly higher than last year at the same date, as bookings are higher in Canada and in Europe. In local currency, prices are higher in both Canadian and European markets. However, average revenue per booking in Canadian dollars is similar to that of 2009 at the same date, due to the lower year-over-year value of European currencies.

From Canada to sun destinations, capacity, bookings and load factors are similar to 2009. As of today, and as was the case for the past winter season, selling prices remain under strong pressure, due to overcapacity in the marketplace.

In France, sales on medium-haul destinations are lower than in 2009 at the same date and selling prices are under very strong pressure. On long-haul destinations, volumes and selling prices are higher than last year.

As a significant portion of its inventory remains to be sold, both in Canada and Europe, the Corporation is not in a position to provide an outlook for the summer of 2010. The strengthening of the Canadian dollar against European currencies will have a negative impact on income generated in Europe when translated into Canadian dollars.

Additional Information

The results of the second quarter of 2009 and 2010 were impacted by non-cash and non-operating items, as summarized in the following table:

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 second quarter of 2010, this translated into a $9.1 million non-cash gain ($6.3 million after income taxes) compared with a $37.4 million gain ($25.7 million after income taxes) in 2009.

The Corporation also uses hedging instruments to mitigate exchange rate exposure stemming from its expenses made in foreign currencies, mainly the US dollar. 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 second quarter of 2010, Transat recorded a $3.0 million gain ($2.2 million after income taxes) on these foreign currency hedging instruments, compared with a $51.0 million loss ($35.1 million after income taxes) in 2009. For the first six-month period, Transat record a non-cash gain of $18.0 million ($12.6 million after income taxes), compared with a non-cash loss of $85.0 million ($57.0 million after income taxes) in 2009.

Commercial paper—Results for the quarter include a $1.9 million gain ($1.9 million after income taxes) from the Corporation’s investments in asset-backed commercial paper (ABCP). In 2009, Transat had recorded a loss of $5.2 million ($4.2 million after income taxes) on its ABCP investments. As of April 30, 2010, the total accumulated provision represented 41.5 % of the notional amount of the Corporation’s $127.0 million in ABCP investments.

Gain on restructuring—On September 24, 2009, Transat announced a plan to make structural changes to its distribution network in France. For the second quarter, the Corporation reported a $1.0 million gain on disposal of assets, comprising mainly gains on the sale of travel agencies.

Summary of non-cash items—Before the aforementioned non-cash and non-operating items, Transat posted an adjusted after-tax loss of $2.7 million ($0.07 per share on a diluted basis) for the second quarter 2010, and an adjusted after-tax loss of $20.9 million ($0.55 per share on a diluted basis) for the first six-month period.

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. (TSX: TRZ.B, TRZ.A)

NOTES

The following are non-GAAP financial measures used by management as indicators to evaluate ongoing and recurring operational performance.

(1) MARGIN (OPERATING LOSS): Revenues less operating expenses

(2) ADJUSTED INCOME (LOSS): Income (loss) before income taxes, non-controlling interest in business units’ results, impact of fuel hedge accounting, ABCP revaluation, and restructuring charges (gain on restructuring).

(3) ADJUSTED AFTER-TAX INCOME (LOSS): Net income (loss) before impact of fuel hedge accounting, ABCP revaluation and restructuring charges (gain on restructuring), net of related taxes.

For more information on non-GAAP financial measures, please refer to the “Non-GAAP financial measures” section of the Management’s Discussion and Analysis report.

Conference call

Second quarter 2010 conference call: Thursday, June 10, 2010, 10 a.m. Dial 1 866 223-7781 or 514 392-1478. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1 800 408-3053 or 514 861-2272, access code 4832211 pound sign, until July 9, 2010.

Non-GAAP measures

Transat prepares its financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”). We will occasionally refer to non-GAAP financial measures in the news release. These non-GAAP financial measures do not have any meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. They are furnished to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with GAAP. All amounts are in Canadian dollars unless otherwise indicated.

 
Caution regarding forward-looking statements

This news release contains certain forward-looking statements regarding the Corporation’s expectation that the assumptions used in the valuation of the ABCP securities will materialize, and that travel reservations will follow the trends. In making these statements, the Corporation has assumed that the trends in reservations, fuel prices and other costs will continue and that the margins (EBITDA) in dollars will be affected by competition and an economic slowdown. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements contained in this press release. Factors that could lead actual results to differ include, among others, extreme weather conditions, war, terrorism, market and general economic conditions, disease outbreaks, demand fluctuations related to seasonality in the travel industry, ability to reduce operating costs and workforce, labour relations, collective agreements and labour conflicts, issues related to pensions, exchange rate, interest rates, future funding, evolution of legal environment, introduction of unfavourable regulations, lawsuits and legal challenges, and other risks detailed from time to time in the Corporation’s continuous disclosure documents.

These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable, but cautions the reader that these assumptions regarding future events, many of which are beyond its control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect the Corporation. For additional information with respect to these and other factors, see the Annual Information Form and Annual Report for the year ended October 31, 2009, filed with Canadian securities commissions. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities laws.