Demanding quarter due to fuel prices, market conditions
- Revenues of $937.0 million, compared with $867.3 million in 2010.
- Margin¹ of $14.6 million, compared with $53.9 million in 2010.
- Net loss of $2.9 million, compared with net income of $20.9 million in 2010.
- Adjusted after-tax income³ of $2.8 million, compared with $26.8 million in 2010.
Montreal, September 8, 2011
Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $937.0 million for the quarter ended July 31, 2011, compared with $867.3 million in 2010, an increase of $69.6 million, or 8.0%. The Corporation recorded a margin¹ of $14.6 million, compared with $53.9 million in 2010, and a net loss of $2.9 million ($0.08 per share on a diluted basis), compared with net income of $20.9 million ($0.55 per share on a diluted basis) in 2010. Before non-cash and non-operating items, Transat reported an adjusted after-tax income³ of $2.8 million ($0.07 per share on a diluted basis), compared with $26.8 million ($0.70 per share on a diluted basis) in 2010.
“These disappointing results are mainly attributable to fuel prices and market conditions, which had a negative impact on margins,” said President and Chief Executive Officer Jean-Marc Eustache.
Third quarter highlights
The Corporation’s third-quarter revenues increased by $69.6 million. The increase is attributable to a higher number of travellers on the transatlantic market, and to the decline of the Canadian dollar against the euro and pound sterling, which translated into an increase in the revenues of foreign business units when expressed in Canadian dollars. The Corporation recorded a margin¹ of $14.6 million, compared with $53.9 million in 2010.
Revenues of North American business units, which are generated by sales in Canada and abroad, increased by $80.3 million (14.8%) compared with the same period in 2010. The increase is attributable to the higher number of travellers, offset by lower selling prices stemming from a significant increase in capacity, as several carriers transferred seats to the transatlantic market in the wake of the March tsunami in Japan, as well as challenging economic conditions in Europe, leading to intense competition on the transatlantic market. The result was lower load factors and the Corporation’s inability to offset the 30% increase in fuel costs. As a result, North American business units recorded an operating loss of $16.0 million, compared with a margin of $26.6 million in 2010.
Revenues of European business units, which are generated by sales made in Europe and in Canada, decreased by $10.7 million (3.3%) over 2010. Except for Vacances Transat (France), revenues decreased during the quarter, mainly due to a decrease in the number of travellers and despite higher selling prices and the strengthening of European currencies. European operations generated a margin of $30.6 million for the quarter, compared with $27.4 million in 2010. The margin increase is mainly attributable to higher selling prices.
9-month period highlights
For the first nine months, the Corporation’s revenues increased by $127.9 million over 2010. This increase is attributable to more travellers on the sun destination and transatlantic markets. In addition, the decline of the Canadian dollar against the euro and pound sterling translated into an increase in the revenues of foreign business units when expressed in Canadian dollars. For the period, Transat recorded an increase of approximately 0.5% in the number of travellers, taking into account a reduction in the number of travellers from France in the wake of unrest in North Africa. The Corporation recorded a margin¹ of $9.1 million, compared with $49.7 million in 2010.
Revenues of North American business units increased by $120.8 million (5.8%) compared with the same period in 2010. The increase is attributable to a 6.0% increase in the number of travellers, while selling prices were slightly lower compared to the previous year. The Corporation was unable to increase its selling prices to offset the rise in fuel prices, and excess supply on the transatlantic market caused lower load factors, translating in pressure on margins. As a result, North American operations recorded an operating loss of $12.4 million, compared with a margin of $35.7 million in 2010.
Revenues of European business units increased by $7.1 million (1.1%) over 2010. Average selling prices were higher than for previous year, while numbers of travellers were inferior. European operations generated a margin of $21.5 million for the period, compared with $14.0 million in 2010.
Financial position
The Corporation’s cash totalled $307.6 million as at July 31, 2011, compared with $217.3 million as at July 31 2010. Working capital ratio was 1.02 as at July 31, 2011, compared to 1.01 a year earlier. Total balance sheet debt decreased by $14.2 million during the 12-month period, to $6.9 million. The net cash4 position improved by $104.6 million, from a net cash position of 196.2 million as at July 31, 2010 to $300.8 million as at July 31, 2011. These increases in cash are punctual, and are in part attributable to income generated in the last twelve months, as well as an increase in accounts payable as at July 31.
Off-balance-sheet agreements stood at $598.8 million as at July 31, 2011, compared with $542.6 million as at July 31, 2010, reflecting new leases for additional Airbus A330s as part of the Air Transat fleet renewal program.
Cash flows from operating activities decreased by $2.8 million during the quarter, from $48.2 million in 2010, to $45.4 million in 2011; and increased by $42.7 million during the first nine months, from $154.9 million in 2010 to $197.6 million in 2011.
Changes in management
“We have a healthy balance sheet, but the situation demands that we take action to return to profitability,” said Jean-Marc Eustache, President and Chief Executive Officer. “We have begun reviewing all operations and developing a plan focused mainly on reducing direct and operating costs, and on revisiting our approach to our IT systems. This is in addition to projects already under way aimed at optimizing the management of our airline assets and improving product strategies. Finally, we are immediately starting to implement changes to simplify our organizational structure in Canada, in order to accelerate decision-making and execution. With this in mind, by mutual agreement we are announcing today the departure of Chief Operating Officer Nelson Gentiletti, as well as Transat Tours Canada President Michael DiLollo. I want to take this opportunity to thank them both for the work they have accomplished at Transat all these years.”
Allen B. Graham, President and Chief Executive Officer of Air Transat, is appointed President, Transat Canada. Reporting to Mr. Eustache, he will oversee the operations of business units Air Transat, Transat Tours Canada, Transat Distribution Canada, Canadian Affair, Air Consultants Europe and Handlex. Transat France, Transat Discoveries, tripcentral.ca and Jonview Canada will report directly to the President and CEO. André De Montigny is appointed President, Transat International and will be responsible for Eleva Travel, Tourgreece, Trafic Tours, Turissimo and hotel operations, while remaining Vice-President, Business Development.
Outlook
The transatlantic market accounts for a very significant portion of Transat’s business in the summer. For the fourth quarter, the Corporation’s capacity is 12% higher than in 2010. Slightly more than 80% of capacity has been sold and load factors are 4% inferior to the previous year at the same date. Selling prices (including fuel surcharges) are similar to last year, despite an increase of approximately 30% of fuel prices, when expressed in Canadian dollars.
In France, bookings for medium-haul travel are slightly behind compared to last year, due to unrest in North Africa. However, the decrease in bookings for North African destinations, notably Tunisia and Egypt, is partially offset by the rise on other destinations. On long-haul travel, bookings are more than 10% higher than the prior year. Average selling prices are higher than last year.
Consequently, Transat expects the results of the fourth quarter to be inferior to the record results reported last year.
Additional Information
The results were affected 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 third quarter 2011, this translates into a $8.3 million non-cash loss ($5.9 million after income taxes) compared with a loss of $3.0 million ($2.1 million after income taxes) in 2010. For the first nine months of 2011, this translates into a $3.7 million non-cash gain ($2.7 million after income taxes) compared with a $7.4 million gain ($5.1 million after income taxes) in 2010.
The Corporation also uses hedging instruments to mitigate exchange rate exposure stemming from its expenses and/or revenues in foreign currencies. 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 2011, Transat recorded a $2.1 million loss ($1.5 million after income taxes) on these foreign-currency hedging instruments, compared with a $3.2 million gain ($2.2 million after income taxes) in 2010. For the first nine months of 2011, Transat recorded a $6.0 million loss ($4.5 million after income taxes) on these foreign-currency hedging instruments, compared with a $21.1 million gain ($14.8 million after income taxes) in 2010.
Commercial paper—Results for the quarter include a $0.3 million gain ($0.3 million after income taxes) stemming from the revaluation of the Corporation’s investments in asset-backed commercial paper (ABCP). In 2010, Transat had recorded a revaluation loss of $3.9 million ($3.9 million after income taxes). As of July 31, 2011, the total accumulated provision represented 33.2% of the notional amount of the Corporation’s $117.0 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 first nine months of 2010, 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 income of $2.8 million ($0.07 per share on a diluted basis) for the quarter, compared with $26.8 million ($0.70 per share on a diluted basis) in 2010, and an adjusted after-tax loss of $17.3 million ($0.46 per share on a diluted basis), compared with an adjusted after-tax income of $5.9 million ($0.16 per share on a diluted basis) in 2010 for the first nine months.
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) NET CASH: Cash and cash equivalents not held in trust or otherwise reserved, less balance sheet debt.
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 2011 conference call: Thursday, September 8, 2011, 10.00 a.m. Dial 1 888-222-7048. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1 800 633-8625 or 416 626-4144, access code 21536108, until October 8, 2011.
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 and selling prices will continue, and that fuel prices, other costs and the value of the Canadian dollar against foreign currencies will remain stable. 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, 2010, 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.