Transat A.T. Inc. – Results for third quarter 2010

After a challenging winter, transatlantic market brings satisfactory third quarter results

  • Revenues of $867.3 million, compared with $819.4 million in 2009, reflecting an increase in the number of travellers.
  • Margin¹ of $53.9 million, compared with $27.2 million in 2009, an increase primarily linked to the performance of the transatlantic market.
  • Adjusted after-tax income³ of $26.8 million ($0.70 per share), compared with $7.0 million in 2009 ($0.21 per share).
  • Net income of $20.9 million, compared with $31.0 million in 2009, the variance being mainly attributable to a non cash gain of $30.6 million related to fuel hedging, in 2009.
Montreal, September 9, 2010

 

Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $867.3 million for the quarter ended July 31, 2010, compared with $819.4 million for the same period of 2009, an increase of 48.0 million, or 5.9%. The Corporation recorded a margin¹ of $53.9 million, compared with $27.2 million in 2009, and net income of $20.9 million ($0.55 per share on a diluted basis), compared with $31.0 million ($0.94 per share on a diluted basis) in 2009. Before non-cash and non-operating items, Transat reported an adjusted after-tax income3 of $26.8 million ($0.70 per share on a diluted basis) for the third quarter of 2010, compared with $7.0 million ($0.21 per share on a diluted basis) in 2009.

“We are satisfied with these results. We recorded an increase in the number of travellers, good load factors, as well as higher selling prices on the transatlantic market. International tourism remains resilient, people continue to show an inclination to travel,” said Jean-Marc Eustache, President and Chief Executive Officer.

Third quarter highlights

The Corporation’s third quarter revenues increased by 5.9%, or $48.0 million. As a percentage of revenues, the Corporation’s margin¹ increased from 3.3% in 2009 to 6.2% in 2010. These increases are attributable to more travellers, higher load factors, and higher average selling prices on the transatlantic market. On the sun market from Canada, margins were lower, as cost reductions only partly offset a decrease in selling prices. Market conditions remained challenging, and competition intense, on the French medium-haul market, with a negative impact on Look Voyages margins.

Revenues of the North American business units, which are generated by sales in Canada and abroad, increased by $66.0 million (13.8%) compared with the same period in 2009. The increase is attributable to a 13.3% increase in the number of travellers, and to an increase in average selling prices on the transatlantic market. North American business units recorded a margin of 4.9%, compared with 1.1% in 2009. The increase in margin is also attributable to higher load factors.
European business units, which are generated by sales made in Europe and in Canada, record an unfavourable variance in revenues of $18.0 million (5.3%) in the third quarter compared with the same period in 2009, mainly due to lower euro and pound sterling. European operations generated a margin of $27.4 million, compared with $22.0 million in 2009. The increase in margin is mainly attributable to higher volumes and prices at Canadian Affair, offset in part by lower margins at Look Voyages in France.

Nine-month period highlights

Revenues for the first nine months to July 31 declined by $105.4 million compared with 2009. The decrease is attributable to the winter season, when intense competition reduced prices for sun destinations significantly and Transat decided to reduce capacity, and to a lesser extent to 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 2.0% in 2009 to 1.8% in 2010. “In light of the particularly challenging winter we had, it’s worth noting that the third quarter has brought our cumulative margin to almost the same level as in the previous year,” said Denis Pétrin, Chief Financial Officer.

Revenues of the North American business units, which are generated by sales in Canada and abroad, decreased by $44.1 million (2.1%) compared with the same period in 2009. The decrease is attributable to a decline in average selling prices, offset in part by a 2.7% increase in the number of travellers. For the nine-month period, Transat posted a margin of 1.7%, compared with 2.1% in 2009. The decline in margin is attributable to the winter season, when intense competition reduced prices for sun destinations significantly, and to 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. Third quarter results thus partly compensated the decrease recorded in the first half.

Revenues of European business units, which are generated by sales made in Europe and in Canada, decreased by $61.3 million (8.8%) compared with the same period in 2009. The decrease results from a the weakness of the euro and the pound sterling against the Canadian dollar, as well as lower selling prices on the medium-haul market, offset in part by higher volumes. The larger number of travellers is attributable to higher volumes at Canadian Affair, offset in part by lower volumes in France. European operations generated a margin of $14.0 million, compared with $12.5 million in 2009. The increase in margin stems mainly from more travellers, higher prices, and higher load factors at Canadian Affair, offset in part by lower selling prices on the French medium-haul market, the costs related to volcanic activity in Iceland, as well as the loss of value of European currencies.

Financial position

Cash and cash equivalents not held in trust stood at $217.3 million as of July 31, 2010, compared with $180.6 million as of October 31, 2009. Balance sheet debt amounted to $21.1 million as of July 31, 2010, or $89.8 million lower than at October 31, 2009.

Outlook

For the fourth quarter, on the transatlantic market, Transat’s capacity is approximately 15% higher than in 2009. The Corporation’s load factor is similar to last year at the same date, with bookings higher in Canada and Europe. Average revenue per booking in Canadian dollars is higher to that of 2009 at the same date, despite the weakness of European currencies against the Canadian dollar.

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

In France, sales on medium-haul destinations are lower than in 2009 at the same date and margins are under very strong pressure. On long-haul destinations, volumes and selling prices are slightly higher than last year, but costs are also higher due to the weakness of the euro.

For the fourth quarter, if the trend remains unchanged, Transat anticipates higher revenues and significantly higher margin compared with the previous year.

It is too early to comment on the winter 2011. At this moment, capacity and bookings are higher than last year.

Additional Information

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

 chart

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 third quarter of 2010, this translated into a $3.0 million non-cash loss ($2.1 million after income taxes) compared with a $44.4 million gain ($30.6 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 third quarter of 2010, Transat recorded a $3.2 million gain ($2.2 million after income taxes) on these foreign currency hedging instruments, compared with a $48.2 million loss ($33.3 million after income taxes) in 2009. For the first nine-month period, Transat record a non-cash gain of $21.1 million ($14.8 million after income taxes), compared with a non-cash loss of $133.2 million ($90.3 million after income taxes) in 2009.

Commercial paper—Results for the quarter include a $3.9 million loss ($3.9 million after income taxes) from the Corporation’s investments in asset-backed commercial paper (ABCP). In 2009, Transat had recorded a loss of $6.9 million ($6.6 million after income taxes) on its ABCP investments. As of July 31, 2010, the total accumulated provision represented 44.8% of the notional amount of the Corporation’s $126.2 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 third quarter, the Corporation reported a $0.1 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 adjusted after-tax income of $26.8 million ($0.70 per share on a diluted basis) for the third quarter 2010, and adjusted after-tax income of $5.9 million ($0.16 per share on a diluted basis) for the nine-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.

(4) ADJUSTED AFTER-TAX INCOME (ADJUSTED AFTER-TAX LOSS) PER SHARE: Adjusted after-tax income (loss) divided by the adjusted weighted average number of outstanding shares used in computing diluted income (loss) per share.

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

Third quarter 2010 conference call: Thursday, September 9, 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 2854532 pound sign, until October 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.

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