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Transat A.T. Inc. - Results for the second quarter of 2016

As expected, the winter season was affected
by the Zika virus, threat of strike action and a weak dollar

From continuing operations for the second quarter:

  • Revenues of $888.2 million, compared with $875.2 million in 2015.
  • In spite of lower fuel prices, net increase in costs of Sun packages of $25 million due to the weakened Canadian dollar.
  • Adjusted operating loss1 of $5.0 million, compared with an adjusted operating income of $7.8 million in 2015. 
  • Adjusted net loss3 of $11.9 million, compared with $2.7 million in 2015.

From continuing operations for the first six-month period:

  • Revenues of $1.6 billion, compared with $1.6 billion in 2015.
  • In spite of lower fuel prices, net increase in costs of Sun packages of $49 million due to the weakened Canadian dollar.
  • Adjusted operating loss1 of $36.7 million, compared with $15.0 million in 2015. 
  • Adjusted net loss3 of $42.2 million, compared with $25.6 million in 2015.
  • Announcement of the pending sale of the France- and Greece-based tour operators, now reported as discontinued operations.

MONTREAL, June 9, 2016 /CNW Telbec/ - Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $888.2 million for the quarter ended April 30, 2016, compared with $875.2 million in 2015, an increase of $13.1 million, or 1.5%. The Corporation recorded an adjusted operating loss1 of $5.0 million, versus an adjusted operating income1 of $7.8 million in 2015, and a net loss attributable to shareholders of $25.0 million ($0.68 basic and diluted earnings per share), compared to a net income attributable to shareholders of $24.7 million ($0.64 basic and diluted earnings per share) in 2015. Before non-operating items, Transat reported an adjusted net loss3 of $11.9 million ($0.32 per share) for the second quarter of 2016, compared with $2.7 million ($0.07 per share) in 2015.

"With regard to the Sun destinations market, this was a winter best forgotten," said Jean-Marc Eustache, President and Chief Executive Officer of Transat. "The fears prompted by the Zika virus, a threat of strike action by our pilots, the low Canadian dollar, and a dip in demand in Western Canada kept us from improving our profitability, and hid the fact that our change initiatives in line with our strategic plan—including the planned sale of assets in France and Greece—are progressing well." He continued: "As far as summer is concerned, the steep 15% increase in capacity on the transatlantic market is affecting prices and load factors. Demand is relatively firm, but does not rise at such rates. We expect to report results inferior to those of the record summer seasons we have seen in recent years."

Second-quarter highlights

The Corporation posted revenues of $888.2 million, compared with $875.2 million in 2015. The increase of $13.1 million (1.5%) was due mainly to an overall 2.5% rise in the number of travellers, and higher average selling prices for all-inclusive Sun destinations packages, Transat's primary market for the period. During the quarter, the Corporation increased its capacity on Sun destinations routes by 0.7%.

The Corporation posted an adjusted operating loss1 of $5.0 million, compared with an adjusted operating income1 of $7.8 million in 2015. The higher operating loss stemmed mainly from the depreciation of the Canadian dollar vis-à-vis the U.S. currency, which, net of the decrease in aircraft fuel costs, resulted in an increase in operating costs of $25.0 million on Sun destinations packages. Nearly half of that increase was offset by the higher average selling prices. Fears prompted by the Zika virus, the threat of strike action by Air Transat pilots, and a decrease in demand for travel from Western Canada prevented any improvement in profitability.

Ocean Hotels, which is 35% owned by Transat, accounted for $6.3 million of the Corporation's net income for the quarter, compared with $3.7 million in 2015. The increase was due to the strength of the U.S. dollar versus other currencies. Transat's equity participation in Ocean Hotels accounted for $101.9 million in assets as at April 30, 2016, after deduction of the $6.7 million dividend amount received during the past 12 months, compared with $94.5 million as at April 30, 2015. 

During the quarter, the Corporation recorded an impairment charge of $15.8 million, resulting from the introduction of a new booking platform encouraging purchase of seats by European travellers directly from Air Transat, rather than through the European business units. The charge also reflects the recent refocusing on the Transat brand, which has brought about the elimination of certain other brands.

Six-month highlights

The Corporation posted revenues of $1.6 billion for the first six months of the year, compared with $1.6 billion for the same period of 2015, and an adjusted operating loss1 of $36.7 million, compared with $15.0 million in 2015. During the period, the Corporation increased its capacity on the Sun destinations market by 4.5%. The number of travellers on all markets combined for the first six months of the year increased by 5.9%.

The increase in the adjusted operating loss1 was attributable mainly to the decline in value of the Canadian dollar against the U.S. currency, which, net of the decrease in aircraft fuel costs, resulted in a $49.0 million increase in operating costs on Sun destinations packages, nearly 60% of which was offset by the higher selling prices. Fears prompted by the Zika virus, the threat of strike action by Air Transat pilots, and a decrease in demand for travel from Western Canada prevented any improvement in profitability.

For the six-month period, Ocean Hotels accounted for $8.2 million of the Corporation's income, compared with $4.3 million in 2015. That increase was attributable to the strength of the U.S. dollar versus other currencies.

Strategic plan and margin-improvement initiatives

"As demonstrated by the progress in the planned sale of our operations in France and Greece, we are actively pressing forward with implementation of our strategic plan," Mr. Eustache explained. "One of our objectives is to make acquisitions on the distribution side, on a new source market that would deliver synergies with our Canada-based operations—in the U.S., for example, or on the Sun destinations hotel market. We are also moving ahead with our share repurchase program."

As set forth in the plan announced at the end of the first quarter of 2015, the Corporation 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. In 2016, the Corporation expects to save at least $30 million through improvements, chiefly by continuing to apply the cost-reduction program at Air Transat, optimizing hotel costs, and increasing ancillary revenues. The Corporation's target for 2017 is at least $25 million.

Sale of Transat France and Tourgreece

On May 11, 2016, the Corporation announced that it had received a firm offer from TUI AG, the world's leading tourism business, to purchase its France- and Greece-based tour-operating business units (Transat France and Tourgreece, respectively) for an enterprise value of €54.5 million ($79.7 million), subject to working-capital adjustments at closing. The contemplated transaction is subject to approval from European anti-trust authorities as well as obtaining the advisory opinion of the Transat France work council (employee representatives), as mandated by French law. Closing is expected to take place before October 31, 2016.

The proposed transaction will have no impact on Transat's transatlantic program or on the operations and growth strategy of Air Transat in France or elsewhere in Europe, and concerns only operations involving destination countries other than Canada, outbound from France. Air Transat will maintain a structure and staff in France, along with its European distribution network.

Consequently, on April 30, 2016, the assets and liabilities of Transat France and Tourgreece are recorded as held for sale on the consolidated statements of financial position, and their result have been recorded as discontinued operations in the consolidated statements of income (loss) and of comprehensive loss. The planned transaction has no other impact on the Corporation's financial statements for the period ended April 30, 2016.

Compared with 2015, revenues of the Transat France and Tourgreece business units increased by $20.2 million (14.1%). That increase was attributable to higher average selling prices and the opening of new Lookéa resort clubs, offset in part by a decline in revenues resulting from introduction during fiscal 2015 of a new booking platform encouraging purchase of seats by European travellers directly from Air Transat, rather than through the European business units. As a result, the number of travellers increased by 1.0% for the quarter, compared with 2015. Net income from the discontinued operations during the quarter was $0.4 million (0.2%), versus a net loss of $1.7 million (1.2%) for the same quarter in 2015. The increased net income stemmed primarily from higher margins on tour and package products sold, especially to Cuba and Senegal.

For the six-month period, revenues from the Transat France and Tourgreece business units grew by $36.8 million (14.8%). That increase was attributable to higher average selling prices, offset in part by lower revenues stemming from the introduction of the new booking system described previously. The number of travellers during the six-month period was down by 1.8%. The discontinued operations posted a net loss of $7.4 million (2.6%) during the six-month period, compared with $12.4 million (5.0%) in 2015. The reduced net loss was due mainly to higher margins on tour and package products sold, especially to the Caribbean, Cuba and Senegal.

As a result of the planned sale of its French and Greek tour-operating business units, the Corporation will cease geographically segmented reporting of its results.

Financial position

As at April 30, 2016, the Corporation's free cash totalled $440.6 million, compared with $441.5 million at the same date in 2015. The decrease was attributable to the shares repurchased as part of the normal-course-issuer bid launched in April 2015 and to the reclassification of the assets of Transat France and Tourgreece as held for sale, partially offset by the past 12 months' earnings. The working-capital ratio was 1.02, as against 1.01, and deposits from customers for future travel amounted to $483.7 million, versus $578.4 million a year earlier; the decrease is attributable to the reclassification of deposits to Transat France and Tourgreece as liabilities related to the assets held for sale. Off-balance-sheet agreements, excluding contracts with service providers, stood at $745.8 million as at April 30, 2016, compared with $713.7 million as at October 31, 2015, the increase being attributable to the signing of aircraft leases and the decline in value of the Canadian dollar, partially offset by payments made during the period.

On March 4, 2016, the Corporation completed the 12-month normal-course-issuer bid program that it had initiated on April 10, 2015. As at the current date, the Corporation had repurchased 2,274,921 shares, i.e., the maximum authorized, for a cash consideration of $16.5 million. During the quarter ended April 30, 2016, the Corporation repurchased 286,431 shares, for a cash consideration of $2.2 million.

The Corporation intends to renew its normal-course-issuer bid program for a 12-month period, and will submit a request to that effect with the regulatory authorities. The Corporation will repurchase for cancellation, subject to regulatory approval and in compliance with the provisions of the program, a maximum of approximately 2 million shares, representing 10% of the public float of shares. The purpose of the normal-course-issuer bid program is to allow the Corporation proper utilization, depending on the circumstances and in a wise manner, of a portion of its excess of cash.

The purchases under the Corporation's normal-course-issuer bid program will be made on the open market through the facilities of the Toronto Stock Exchange (TSX) in accordance with its policy on normal-course-issuer bids. The price paid by the Corporation will be the market price at the time of acquisition plus brokerage fees. Purchases may commence once the regulatory approvals are secured.

Outlook

Summer 2016 – The transatlantic market outbound from Canada and Europe accounts for a substantial portion of Transat's business during the summer season. For the period May to October 2016, total industry capacity is higher by 15%, while that of the Corporation is higher by 7%. To date, Transat's load factors on that market are lower by 3.3% than those of summer 2015, 62% of the capacity has been sold, and selling prices of bookings taken are lower by 6.3% than those recorded at the same date in 2015. Lower fuel costs, offset in part by the weakened Canadian dollar, will result in a decrease in operating expenses of 4.6% if the dollar remains at its current level against the U.S. dollar, the euro and the pound, and if fuel prices remain stable.

On the Sun destinations market outbound from Canada, for which summer is low season, Transat's capacity is lower by 1% than that marketed at the same date last year. To date, 45% of that capacity has been sold, load factors are higher by 1.0%, and selling prices are higher by 1.8%. If the weakened Canadian dollar remains at its current value against the U.S. currency, and if fuel prices continue to trend lower, operating expenses will increase by 5.5%.

With regard to the discontinued France-based operations, medium-haul bookings are ahead by 6%, while long-haul bookings are ahead by 10% compared with last year at this time. Average selling prices are similar.

If the current trends hold, Transat expects its global results for the second six-month period to be inferior to those of 2015, which were the second-best in the Corporation's history.

Additional information

The results were affected by non-operating items, as summarized in the following table:

Highlights and impact of non-operating items on results
(in thousands of CAD)

 
 

 

CONTINUING OPERATIONS

Second quarter

First six-month period

2016

2015

2016

2015

Revenues

888,221

875,151

1,613,944

1,559,102

         

Operating income (loss)

(13,701)

(4,039)

(54,243)

(37,539)

 

Depreciation and amortization

11,718

11,790

23,224

22,544

 

Premium related to derivatives matured during the period

(3,019)

(5,666)

Adjusted operating income (loss)1  

(5,002)

7,751

(36,685)

(14,995)

         

Income (loss) before taxes

(34,763)

36,630

(106,819)

(35,331)

 

Fuel-related derivatives and other derivatives

3,877

(39,852)

37,964

2,121

 

Loss on disposal of a subsidiary

843

843

 

Asset impairment

15,809

15,809

 

Premium related to derivatives matured during the period

(3,019)

(5,666)

Adjusted pre-tax income (loss)2

(17,253)

(3,222)

(57,869)

(33,210)

         

Net income (loss) attributable to shareholders

(24,952)

24,704

(86,107)

(39,610)

 

Net income (loss) from discontinued operations

(381)

1,730

7,380

12,437

 

Fuel-related derivatives and other derivatives

2,838

(29,172)

27,790

1,553

 

Loss on disposal of a subsidiary

615

615

 

Asset impairment

12,222

12,222

 

Premium related to derivatives matured during the period

(2,210)

(4,148)

Adjusted net income (loss)3

(11,868)

(2,738)

(42,248)

(25,620)

         

Diluted earnings (loss) per share

(0.68)

0.64

(2.33)

(1.02)

 

Net income (loss) from discontinued operations

(0.01)

0.04

0.20

0.32

 

Fuel-related derivatives and other derivatives

0.08

(0.75)

0.75

0.04

 

Loss on disposal of a subsidiary

0.02

0.02

 

Asset impairment

0.33

0.33

 

Premium related to derivatives matured during the period

(0.06)

(0.11)

Adjusted net income (loss) per share3

(0.32)

(0.07)

(1.14)

(0.66)

 

Hedging – The Corporation records in the statement of income any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk, as well any gains or losses resulting from mark-to-market adjustments of certain hedging instruments used to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. For the second quarter of 2016, this translates into a $3.9 million non-cash loss ($2.8 million after income taxes), compared with a $39.9 million gain ($29.2 million after income taxes) in 2015. For the six-month period, this translates into a $38.0 million non-cash loss ($27.8 million after income taxes), compared with a $2.1 million loss ($1.6 million after income taxes) in 2015.

The Corporation 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 consolidated statement of financial position and consolidated statement of comprehensive income rather than in the consolidated statement of income. For the second quarter of 2016, Transat recorded a $40.8 million loss ($29.9 million after income taxes) on these foreign-currency hedging instruments, compared with a loss of $72.5 million ($52.5 million after income taxes) for the corresponding quarter of 2015. For the first six months of 2016, Transat recorded a $35.2 million loss ($25.8 million after income taxes) on these foreign-currency hedging instruments, compared with one of $15.2 million ($10.7 million after income taxes) in 2015.

Summary of non-operational items – Before non-operating items, Transat posted an adjusted net loss3 of $11.9 million for the second quarter of 2016 ($0.32 per share) compared with one of $2.7 million in 2015 ($0.07 per share). For the first six months, the Corporation posted an adjusted net loss3 of $42.2 million ($1.14 per share on a diluted basis) compared with one of $25.6 million for the first six months of 2015 ($0.66 per share on a diluted basis).

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.

NOTES

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

 

(1)

Adjusted operating income (loss): Operating income (loss) before depreciation and amortization expense, restructuring charge and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period.

(2)

Adjusted pre-tax income (loss): Income (loss) before income tax expense before change in fair value of fuel-related derivatives and other derivatives, gain (loss) on disposal of a subsidiary, restructuring charge, impairment of assets and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period.

(3)

Adjusted net income (loss): Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change in fair value of fuel-related derivatives and other derivatives, gain (loss) on disposal of a subsidiary, restructuring charge, impairment of assets and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period, net of related taxes.

 

Conference call

Second quarter 2016 conference call: Thursday, June 9, 10:00 a.m. Dial 1-800-926-9801. Name of conference: Transat. Webcast: http://www.transat.com/en/. The archived call will be available at 1 800 558-5253, access code 21806235, until July 8, 2016.

Non-IFRS measures

Transat prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). We will occasionally refer to non-IFRS financial measures in the news release. These non-IFRS financial measures do not have any meaning prescribed by IFRS 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 IFRS. 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 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 news release. Factors that could lead actual results to differ include, among others, extreme weather conditions, fuel prices, 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, 2015, 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.

 

SOURCE Transat A.T. Inc.

Media: Michel Lemay, 514 987-1616, ext. 4523; Financial analysts: Denis Pétrin, Chief Financial Officer, 514 987-1660