Transat A.T. Q1 2024 Earnings Call Transcript

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March 14, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone. Thank you for joining us for our fiscal 2024 Q1 conference call. Transat's financial results reflect sustained demand for leisure travel and a solid increase in traffic as revenues grew 17.7 percent year over year to 785,000,000 dollars However, industry wide structural challenges, including costs related to Pratt and Whitney GTF engines, applied downward pressure on profitability. As a result, adjusted EBITDA was negative 8 $600,000 in the quarter, while net loss totaled $61,000,000 Let me remind you that historically, the Q1 has been seasonally weak for Transat. Jean Francois will provide you with more details in a few minutes.

Operator

Before turning to operating metrics, I want to highlight one important recent development. Last month, we announced a new collective agreement with our flight attendants effective until October 2027, providing long term stability in our relationship. You may recall that the union was vocal about our negotiations and the possibility of a strike. The media exposure clearly affected bookings and yields over the last 3 months, a period that typically experiences robust reservation activity. Given the uncertainty, customers were cautious about booking for the holiday season as well as for the winter season.

Operator

The effects witnessed in the Q1 carried into the Q2. The agreement reached 3 weeks ago removed the uncertainty. Our flight attendants play a key role with our customers. Their passion has allowed us to build the solid reputation we have today. They're at the forefront, dedicated and committed.

Operator

By offering them better working conditions, we firmly believe we're making a sustainable investment in Transat's future. During the quarter, we've also continued to improve our operations, reporting significant progress in on time performance. Our performance improved for each month of the quarter. December was especially remarkable with a 15% year over year improvement despite a marked increase in the volume of activity. Another good news on the commercial front is our recently announced partnership with CF Montreal.

Operator

We signed a multiyear agreement with the Montreal based soccer team to become an official partner. This will enhance Air Transat's brand recognition not only across different cultural communities, but also towards families, which have been a key target audience for Transat for years. Over the years, Air Transat has always been more than an airline. It's an ambassador for our city and a bridge between cultures much like CF Montreal. Turning to operating metrics.

Operator

Traffic increased 20% from the Q1 of 2023, while overall capacity increased 25% during the same period. Industry wide capacity increase to Sun destinations led to pressure on yields. A significant increase in capacity and growing uncertainty about the negotiation process with our flight attendants resulted in a 3% decline in yield, while our load factor lost 3.5 points compared to last year's Q1 ending at 80.2%. Lower yield is also a reflection of consumers' price sensitive behavior in the current economic context, a behavior we have been observing over the past few months. In response to the strike threat in the last quarter, we have deployed additional promotional activity.

Operator

These efforts have shown solid year over year improvement in the number of passengers, transactions and revenues. Despite load factor and yield trends for summer 2024 tracking in line with the same period last year, we don't foresee the same uplift exhibited last summer. After an exceptional summer last year, airfares now seem to normalize for 2024. This said, several programs continue to show strong performance and we are pleased with early results of additions to our flight program, such as our routes to Marrakesh and Lima and the annualization of several destinations, including Lyon and Marseille. They are all presenting results above They are all presenting results above expectations with solid low factors, excellent yields and good booking velocity.

Operator

Moving to our forecasted capacity increase for fiscal 2024, we revised our growth plan mainly due to structural issues affecting the industry. First, the aircraft leasing market has been under significant pressure. Due to the operating challenges caused by the Pratt and Whitney engine situation, as well as the problems affecting the Boeing 737 MAX 9, a great number of carriers are looking for aircraft. These issues combined with an already stressed supply chain are putting important pressures on the availability and the cost of aircraft leasing. We currently have 4 aircraft grounded due to Pratt and Whitney situation, a number that is expected to increase to 5 or 6 by the end of the current fiscal year.

Operator

Consequently, in light of expected grounded A321LR aircraft, we have recently secured 3 A330 aircraft leases to support network needs for upcoming years. As planned, we expect to have 4 new A321LR delivered to our permanent fleet over the next month. In the context, we have cautiously reduced our fiscal 2024 planned capacity increase, which we now expect to be 13% compared to 19% previously. In closing, although Transat experienced a more challenging start to fiscal 2024 than expected, we remain committed to executing our strategic plan. The agreement with flight attendants not only eliminates uncertainty for our customers, but also enables us to dive back into the execution of our priorities, which include restructuring of our balance sheet, implementing our commercial JV with Porter with the first phase being deployed this summer, pursuing the deployment of our internal optimization program to increase the efficiency of our operations, deploying solutions to significantly improve revenue management, including generating more ancillary revenue per passenger.

Operator

At the core of our strategic plan is the commitment to providing customers with an outstanding travel experience and cultivating a positive working environment for employees. We believe we are making the appropriate adjustments to reflect a demand environment that remains firm. This is highlighted by our solid cash position and the record customer deposits for future travel in excess of $1,000,000,000 at the end of the Q1. Nevertheless, we remain prudent about our performance for the entire fiscal. A continuous monitoring of the Pratt and Whitney GTF engine situation and adaptive contingency plan and a satisfying settlement with Pratt and Whitney will be key to the rest of the year.

Operator

This concludes my remarks. Jean Francois will now review our financial results.

Speaker 1

Our first quarter top line results show revenue growth of 17.7% year over year, driven by a solid increase in traffic. On the other hand, profitability was negatively impacted by rising industry costs, stemming in part from operating challenges related to the Pratt and Whitney GTF engine issue and an unfavorable year over year aircraft maintenance calendar. As a result, adjusted EBITDA was in negative territory for the Q1 and obviously below expectations. During the quarter, we also completed the previously announced sale of an investment in a hotel in Mexico with proceeds from the transaction applied to reduce secured facilities by $21,000,000 Accordingly, we lowered our long term debt to $665,000,000 at the end of the Q1. Looking ahead, we aim to defer our April 2025 debt maturities.

Speaker 1

As you are probably aware, one of my key priorities upon taking over the position of CFO is to execute a successful refinancing plan. Deferring maturities would provide more flexibility in carrying out a plan beneficial to all stakeholders. Additionally, I want to highlight that ongoing discussions with stakeholders are in progress and we will keep you updated as it evolves. Now let's drill down to our Q1 results. Revenues reached $785,000,000 up 17.7% from the Q1 of 2023.

Speaker 1

The increase reflects sustained demand for leisure travel, driven by a 20% increase in traffic expressed in revenue passenger miles. Company wide capacity grew 25% from the same period last year while yield was down 3.1%. Adjusted EBITDA amounted to negative $8,600,000 in the Q1 of 2024 compared to a positive $3,300,000 in the Q1 last year. The variation is mainly due to a year over year increase in operating expenses related to deployed capacity, along with operating challenges related to the Pratt and Whitney GTF engine issue and the leasing of additional aircrafts. In the Q1, we also face an unfavorable aircraft maintenance calendar compared to last year as a result of lower aircraft utilization during pandemic.

Speaker 1

These factors were partially offset by lower fuel expenses, reflecting a price decline of 18% compared to the same period last year. Net loss meanwhile totaled $61,000,000 or 1.58 dollars per diluted share compared to $57,000,000 or $1.49 per diluted share in the Q1 of 2023. Moving to cash flows and financial position. Cash flows from operating activities amounted to $111,000,000 in the Q1 of 24 compared to $195,000,000 in the Q1 of 2023. The decrease can mainly be attributed to an unfavorable variation in changes of non cash balances related to operations and to a greater operating loss in the most recent quarter.

Speaker 1

After accounting for investing activities and repayment of lease liabilities, we generated positive free cash flows in the first quarter at $39,000,000 versus $144,000,000 in the same period last year. In terms of our balance sheet, cash and cash equivalents stood at $453,000,000 at the end of the Q1 of 2024 compared to $436,000,000 at the end of our last financial year. Cash and cash equivalents and trust are otherwise reserved mainly resulting from travel package sales significantly improved year over year reaching $612,000,000 versus $524,000,000 at the end of the same period in 2023. I am pleased to point out that total cash exceeded a record $1,000,000,000 which reflects important efforts made to improve our operations and our ability to convert revenues into cash. Following the debt repayment, Transat's long term debt and deferred government grants stood at $806,000,000 at the end of the Q1 compared to $816,000,000 at the end of fiscal 2023.

Speaker 1

Debt net of cash and cash equivalents improved amounting to $452,000,000 as at January 31, 2024, down $28,000,000 from $380,000,000 at the end of 2023. Turning to our outlook. Considering recent industry related issues that impacted our cost base, we now expect an adjusted EBITDA margin for fiscal 2024 to be at the lower end of the range of 7.5% to 9% announced last December. This updated outlook assumes a 13% increase in available capacity, which still represents healthy growth year over year. Our main assumptions in deriving this forecast include a weak GDP growth in Canada and an exchange rate of CAD1.34 per U.

Speaker 1

S. Dollars and an average price per gallon of jet fuel of CAD4 dollars CAD even. In closing, this conference call marks my first as CFO of Transat. I look forward to opening a dialogue with sell side analysts and the investment community at large to ensure that Transat's path to value creation is well understood. This concludes my prepared comments.

Speaker 1

We will now open the call for questions from analysts.

Speaker 2

Thank The first question will be from Karnar Gupta at Scotiabank. Please go ahead.

Speaker 3

Thanks, operator. Good morning, everyone. So my first question is on, you talked about a few issues in the quarter from Pratt and Whitney to maintenance timing to flight attendant risk for strike as well as the industry pressures that we're seeing. I think of all these issues seems like the Brett and Whitney and the labor noise were sort of the transitory issues for sure. So I'm just wondering what was your expectation heading into the quarter back in mid December, let's say, about EBITDA and like how much did you fall short because of these two issues, which I would say is transitory?

Speaker 1

Well, obviously, the situation evolves and the expectation that we had in back in December, as I said, EBITDA was below expectations. So obviously, results or impacts for the quarter were worse than expected. That being said, obviously, the guidance is an annual guidance. We don't provide a quarterly guidance. And I can certainly not talk about what was the impact expected in the Q1 specifically.

Operator

Maybe I can add that when we back then in December, we had a first tentative agreement that was signed with the flight attendants. And we observe a clear decline in our bookings at different periods. 1st, when there was a first right to strike that was voted at the end of November, Then we observed solid booking increases following the signing of the 2 tentative agreements. And afterwards, we saw significant slowdown again following the rejections of the agreement. So overall, a clear correlation of events in our bookings, unfortunately, that honestly, we had not anticipated back then in December.

Speaker 3

Right. Okay. Makes sense. That's very helpful.

Operator

Yes. If I can add something else. The other thing that we might not have anticipated that well, I would say, is the how the market, the leasing market has tightened over the last month. So in order to mitigate the impacts of the Pratt and Whitney engines and the fact that we have aircrafts that are grounded right now and will be grounded additional aircraft will be grounded over the next month, The aircraft leasing market has tightened for different reasons that we know. The supply chain is becoming very challenging for all the suppliers.

Operator

So, Pratt and Whitney is facing their issues. Boeing 737 MAX is another issue. So, a lot of carriers are looking for additional aircraft right now. So the demand is very high and the offer is very limited in the market. So automatically, this is putting a pressure on higher prices for leasing.

Speaker 3

Right, right. Makes sense. Thanks, Anik, and thanks, Jean Francois. And if I can just quickly follow-up on your full year guidance for capacity, I mean, 13% still is pretty decent capacity growth coming out of the pandemic and all that, but still a decent cut from the 19% you were expecting. So I understand like there's issues from the leasing markets that you mentioned, I think.

Speaker 3

But are you only seeing the limited availability of aircraft at this point, which is why you're cutting capacity guidance? Or is it that you're also reducing utilization in some markets?

Operator

No. We have reduced capacity. We have canceled routes because of lack of aircraft. So from what we anticipated at the beginning of the year, so we have reduced overall capacity. We have cancer routes on the domestic market.

Operator

We have cancer routes on the U. S. Market as well for the upcoming summer. We really want to be cautious. This is why we have reviewed our capacity because we have a scenario on the information that we have so far from Pratt and Whitney.

Operator

We want to be cautious and make sure that we don't take too much risk for the upcoming year. So that's why we made those recent changes. And they are really these changes are really driven by what we're facing with the patent wetting right now. That being said, we continue to increase aircraft utilization. So this is why we are able even though we don't have the same number of aircraft we were expecting or we should continue to increase aircraft utilization, which allows us to maintain a decent increase in the market.

Speaker 3

Great. That's great color. Thanks so much for the time.

Operator

Welcome.

Speaker 2

Thank you. Next question will be from Benoit Poirier at Desjardins. Please go ahead.

Speaker 4

Yes. Thank you very much. Good morning, Annie. Good morning, Jean Francois.

Operator

Good morning.

Speaker 4

Yes. Looking at your top line, revenue was only up 18% year over year versus a capacity increase of 5%. Could you maybe quantify what the impact of flight attendance strike speculation in the quarter was? And what would be your load factor or yield if these events would not occur?

Operator

Well, as I explained earlier, well, it's difficult to define exactly what was the exact impact in numbers, but we as I explained earlier, we definitely saw a correlation between all the events that happened throughout all the announcement that happened throughout the negotiations in our bookings. So of course, the load factor was affected by that lower volume. Even though we put a lot of marketing initiatives in the market, just based on what we were receiving in terms of feedback in the call center, The clients were very afraid of booking, especially during Christmas period. They didn't want to put their vacation in jeopardy, so we even received some cancellations of travel. But so that's it.

Operator

People didn't know in terms of uncertainty. They didn't want to take any chance in booking with that.

Speaker 4

Okay. And in your presentation, I think you mentioned that there it also impacted booking in Q2. How comparable it is in terms of a drag in Q2 so far? Is it a little bit less or comparable to the Q1?

Operator

It is pretty much comparable. The negotiation happened during key months of booking, the month of December, the month of January, January being the highest month of booking for the winter period and the beginning of the summer period as well. So the whole month of January was affected. This is where we received the second rejection of the not the second rejection, but the first rejection of the Arpin des Princes, so the agreement. And we saw a definite impact on our bookings.

Operator

So unfortunately, it happened during a peak period of booking.

Speaker 4

Okay. Okay. And with respect to the GEER turbofan issues, you made a good call out in your So good job on this side. I'm just wondering whether what kind of impact we could expect for the full year and I suspect this would be included in your revised guidance?

Speaker 1

Absolutely. It is all included or all inclusive in our full year revised guidance, yes.

Speaker 4

Okay. And now if we look at the overall competitive landscape, we've seen continued consolidation of the Canadian airline market post WestJet Sunwing acquisition, the link shutdown, the reduction in capacity expansion plan. I would be curious to get your thoughts about how do you expect pricing to evolve over the coming years in Canada given the market dynamics we see out there?

Operator

Is 2 strong players, Westchester in Western Canada and Air Canada more focused on Eastern Canada. I think that what happened with Lynx is another example of the challenge of the low cost ultra low cost model in Canada, a challenge for which is a challenge for multiple factors, driven by the population landscape, Canadian airport costs, which are among the highest in the world, the seasonality of the Canadian market as well. We don't see with the departure of Link, we don't see a significant impact in the market. They had a small program. They were not yet upscale.

Operator

We won't comment on Flare, but I think it's still challenging for them, but we'll see what's going to happen there. However, the CISA links, while backed by strong investors with experience in low cost business model, could decrease significantly the confidence in ULCC model in Canada. And in that context, I would say that's a strength that when we look at the position of players like Transat and Porter and we see us playing together and collaborating together more and more as an alternative, solid alternative to AC and WestJet in Canada.

Speaker 4

Okay. And we've shared some reports, Anik, where Canadian Airlines are having trouble hiring pilots and pilot salaries obviously enough. Can you talk a little bit about how this would compare in terms of hiring pilots versus history?

Operator

The hiring of pilots is going well on our side. In terms of retention as well, we had a couple of challenges of retention, a couple just after the pandemic. But right now, we renewed the pilot collective agreement back in April 2022, and our contract is in effect until April 2025. Relationships are going well. Pilot attraction and retention remains our priority for sure.

Operator

So we make sure that our relationship remains healthy, solid. We keep open discussion. And day after day, we work at increasing or enhancing their overall conditions. So things have been going well so far for us.

Speaker 4

Okay. And then maybe just a quick one for Jean Francois. Just in terms of CapEx, given your number on how should we be thinking about your overall CapEx envelope for the year?

Speaker 1

Yes. Obviously, in light of the revised guidance, we have revised our CapEx plan as well. So it's been revised down obviously. Like it was said in December, we have a few checks and maintenance, a calendar is heavier than it was previously. We have some obviously some IT projects related to the digitalization of our processes.

Speaker 1

There's also playing into having a role in the CapEx program. And obviously, I'm sure you're aware of the project that we have of internalizing our ground and lane services at the Montreal airport. And obviously, it goes with some CapEx to be or some projects to invest in. So but I have to confirm that we have revised down our CapEx plan for the year.

Speaker 4

Okay. Thank you very much for the time. You're welcome.

Speaker 2

Thank you. Next question will be from Cameron Doerksen at National Bank. Please go ahead.

Speaker 5

Yes, thanks. Good morning. Just want to follow-up on the capacity adjustment that you've made. So if we look at Q1, your ASM is up 25%. Just wondering if you can comment on, I guess, with the new plan, what capacity growth looks like for Q2?

Speaker 5

And I'd assume we'd see a pretty significant deceleration as we get into the summer period. So just any comments on kind of the capacity sort of by quarter here over the rest of the year?

Operator

Yes, for sure. So when we're looking at Q2 right now, we're looking at an increase of about 14% compared to previous year. So overall, for the winter, this would represent an increase of 19 percent. And when we're looking at summer, we're more looking at a 9% increase over last year. So overall, when we look at 2024, this will reflect an increase in capacity of 13% compared to 2023 compared to 19% that we had planned at the beginning of the year.

Speaker 5

Okay. No, that's very helpful. And just around, I guess, the early look at the summer yields, I mean, it still sounds like a fairly healthy summer period. But just want to make sure I understand the commentary around the expectation that you don't see the uplift in yields through the summer that we saw last year. I guess you're sort of referring to the fact that I guess yields sort of got progressively stronger as we got down the booking curve last year and that you're just not seeing the same type of trend.

Speaker 5

Is that fair to say?

Operator

Yes. We still see robust demand for overall leisure travel. So we see a same trend this winter and the upcoming summer. We see that travel definitely remains a priority for consumer. However, overall demand growth is not at the same level as it was last year.

Operator

We remind ourselves that 2023 was an exceptional year, especially in terms of yield. So it's still early in the season to comment, but to date we see bookings and pricing conditions that are largely in line with last year, but we see at the same time all the capacity that has been deployed in the market for this upcoming summer. So we know that there's going to be pressure on yields. We start to see it. And so we don't foresee, as I said, the same kind of uplift.

Operator

We see that being applied for both South and Europe, even though we see good momentum for bookings in several destination, but it's going to be to the level we saw in 2023.

Speaker 5

Okay. That's helpful. And just on that, I mean, you cited in the press release here is some, I guess, greater price competition, particularly in the Toronto market. Is that a comment about the winter or is that a comment about the summer?

Operator

It's winter.

Speaker 1

Okay.

Operator

Winter is specific to sub destination. If you look at the capacity, the market capacity that was deployed in Ontario, it's specifically winter in Ontario.

Speaker 5

Got it. No, that's very helpful. That was all for me. Thanks very much.

Operator

Thank

Speaker 2

And your next question will be from Jessica Zhang at CIBC. Please go ahead.

Speaker 6

Good morning, Annique. Good morning, Thanks for taking my question. Maybe just circling back on the yield pressure,

Speaker 2

can you

Speaker 6

quantify for us if any of the yield pressure in Q1 reflected the promotional activity that you talked about to protect the booking curve during all the labor noise. Do you have a sense of how like how much of my that had been have been?

Operator

Well, it's difficult to say. We know that we were expecting higher yields. And as explained earlier, we saw the yield and the RASM go down over the days, over the weeks as negotiations were progressing. And we explained a little bit earlier as well that there was a fierce competition, especially on Ontario. So that's I cannot add very much comment around that.

Operator

That's basically it.

Speaker 6

Helpful. And maybe just one more for me. Maybe just touch about like do you have any update on how the partnership with Porter is developing?

Operator

Yes. The Porter the partnership with Porter is going very well. So we announced the joint venture agreement back in November. And since then, we of course, we're working in a co chair pattern right now. We our target is to be unable to open ourselves through the joint venture agreement for this upcoming summer.

Operator

So as you know, we have strong network complementarity. We have strong synergies. We will be able to have a joint pricing approach and optimizing our network as well. And we will be able as well to harmonize the customer service, which is at the heart of the current work that we are doing right now. So it's coming.

Operator

The first phase is coming. The first phase being to connect overall domestic and transborder, border network to our European destination. And with what we're seeing in terms of results from the Co Chair agreement right now, we believe this is going to be extremely promising.

Speaker 6

Okay, perfect. That was all for me. Thank you so much.

Operator

Thank you.

Speaker 2

Thank you. And at this time, it appears that we have no other questions registered.

Speaker 5

Please proceed.

Speaker 7

Thank you, Susie. Thank you, everyone. Our next call will be on June 6 for our Q2 results. I thank you all and have a great day.

Speaker 2

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your

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