Transat A.T. Q2 2024 Earnings Report

Transat A.T. EPS Results

• Actual EPS: -C$1.02
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Transat A.T. Revenue Results

• Actual Revenue: $973.20 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Transat A.T. Announcement Details

• Quarter: Q2 2024
• Date: 6/5/2024
• Time: N/A
• Conference Call Date: Thursday, June 6, 2024
• Conference Call Time: 10:00AM ET

Air Transat is a leading travel brand voted 2025 World's Best Leisure Airline by passengers at the Skytrax World Airline Awards. Its program offers access to international destinations, mainly in Europe, the Caribbean, the east coast of the United States, South America and North Africa. Air Transat is recognized for its excellent customer service. Its fleet includes some of the most energy-efficient aircraft in their category. Based in Montreal with major hubs in YUL Montréal-Trudeau International Airport and Toronto Pearson Airport (YYZ), it has 5,000 employees with a common purpose to bring people closer together. Air Transat is a business unit of Transat A.T. (TSE:TRZ) (TSX: TRZ).

Transat A.T. Q2 2024 Earnings Call Transcript

Key Takeaways

• Transat reported 12% revenue growth in Q2 2024 driven by a 12% increase in traffic and 13% added capacity, but adjusted EBITDA fell to $38 million due to intense competition and ongoing Pratt & Whitney engine issues.
• Capacity rose 13% year-over-year with an 85.5% load factor, yet yield declined 7.5%, leading Transat to trim its full-year capacity expansion from 13% to 11% as summer load factors and yields track 2.1 and 8 points below last year respectively.
• Operational performance improved significantly with a 9-point increase in on-time arrivals, the insourcing of passenger and ramp services at Montreal-Trudeau to boost customer satisfaction, and delivery of seven additional aircraft to offset grounded planes.
• Transat launched the first phase of its commercial joint venture with Porter Airlines enabling codeshare bookings, with plans to integrate U.S. routes, South-destination offerings by 2025, and align loyalty programs.
• The company strengthened its balance sheet by repaying $110 million of debt over the last three quarters—including $36 million of high-interest subordinated debt—extended secured debt maturities to 2026, and cut net long-term debt by $100 million to $252 million.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to the Transat conference call. Note that this call is being recorded, and I would like to turn the meeting over to Ms. Andréan Gagné, Senior Director, Communications and Corporate Affairs. Please go ahead, Ms. Gagné.

[Andréan Gagné, Senior Director of Communications and Corporate Affairs at Transat]

Thank you, Sylvie. [Foreign language] Hello, everyone, and thank you for attending our earnings call of the second quarter ended April 30, 2024. I'm here this morning with Annick Guérard, President and CEO, and Jean-François Pruneau, our Chief Financial Officer. Annick will provide an overview of the quarter and share comments on the current operational situation and commercial plans for the future. Jean-François will after cover our financial results in more detail. We will then take questions from financial analysts. Questions from journalists will be handled offline after this call. The conference call will be held in English, but questions may be asked in French or English. As usual, our investors' presentation has been updated and is posted on our website in the Investors section. Jean-François may refer to it as he presents the results.

[Andréan Gagné, Senior Director of Communications and Corporate Affairs at Transat]

Our comments and discussion today may contain forward-looking information about Transat's outlook, objectives, and strategies that are based on assumptions and subject to risk and uncertainty. Forward-looking statements represent Transat's expectations as at June 6, 2024, and accordingly are subject to change after such date. Our actual results could differ materially from any stated expectation. Please refer to our forward-looking statement in Transat's second quarter news release, available on transat.com and on SEDAR. With that, let me turn the call over to Annick for opening remarks.

[Annick Guérard, President and CEO at Transat]

Good morning, everyone. Thank you for joining us for our fiscal 2024 second quarter conference call. Transat delivered double-digit revenue growth for a second straight quarter in Q2 2024 on the strength of sustained customer traffic. On the profitability side, adjusted EBITDA decreased to CAD 38 million due to well-documented industry-wide and company-specific issues, including a highly competitive environment, creating downward pressure on yields and the ongoing impact of Pratt & Whitney engine issues. We promptly responded to the situation by implementing initiatives to mitigate the impact of these challenges that will remain over a longer period. In terms of our financial position, we continued our ongoing deleveraging efforts, which total approximately CAD 110 million in debt repayments in the last three quarters. Jean-François will provide you with more details in his financial overview.

[Annick Guérard, President and CEO at Transat]

Turning to operating metrics for the quarter, customer traffic increased 12% from the second quarter of 2023, while overall capacity grew 13%. Capacity offered for sun destinations, our main programs during the quarter, also increased 13% year-over-year. Our load factor of 85.5% for the second quarter remain largely in line with last year. However, yield decreased 7.5% year-over-year due to increased competition industry-wide, the ongoing economic slowdown, the negative effects of potential strikes on revenues, and inefficiencies related to grounded aircraft. Regarding our on-time performance, despite an increase in flight volume year-over-year, second quarter results showed a marked improvement by nine percentage points. This demonstrates our operational team's unparalleled focus and execution.

[Annick Guérard, President and CEO at Transat]

As we look ahead to the second half of the fiscal year, we are fully prepared from an operational standpoint to welcome passengers for the summer season. Our team has worked diligently to ensure our operations are seamless and efficient. First, we recently completed the process of bringing in-house passenger and ramp services at Montréal–Trudeau International Airport. The Montréal Airport represents a key hub for Transat, where we have a strong footprint and operate a high volume of flights. We firmly believe this strategic move will improve customer service and enhance our well-earned reputation in this area. We have already seen an increase in customer satisfaction as a result. Second, we've just launched this week the first phase of our joint venture with Porter Airlines, which will generate incremental customer traffic. Travelers can now book direct and connecting flights with either Air Transat or Porter.

[Annick Guérard, President and CEO at Transat]

Our code-sharing partnership results so far have been in line with our expectations, so we are confident about the added potential of this JV. Third, we are taking delivery of seven additional aircraft for this summer, including four A321LRs, bringing the total to 19, and three A330 aircraft on permanent leases to mitigate the impact of grounded planes. Turning to key indicators, load factors for the summer season are currently down 2.1 percentage points from the same period last year, while yields are 8% lower. Reflecting current market conditions and aircraft availability, we have adjusted our capacity expansion plans slightly for fiscal 2024 from 13%-11%. Our flight portfolio, however, remains the same, with a total of 45 destinations covered this summer, including the addition of Marrakech and Lima.

[Annick Guérard, President and CEO at Transat]

In summary, we delivered encouraging top-line results in the second quarter, despite prevailing challenges, both industry and customer specific. We are highly optimistic about our commercial joint venture with Porter, which is expected to generate incremental bookings. We reimbursed CAD 110 million in debt during the last three quarters to improve our overall financial position. However, it is clear that this year is a challenging one for Transat. We are facing multiple external factors, some beyond our control, but also some in areas where we can make a significant difference. We are proactively implementing measures to navigate these turbulent times effectively. In an industry that has endured significant damage stemming from the pandemic, including severe supply chain disruptions, patience and resilience are crucial. It is not a straightforward journey, but with our dedicated team and strategic initiatives, we are confident in our ability to overcome these obstacles.

[Annick Guérard, President and CEO at Transat]

Before I close, I would like to thank our loyal customers and recognize the unwavering commitment of our teams in providing outstanding customer service, which remains at the core of everything we do at Transat. This concludes my remarks. Jean-François will now review our financial results.

[Jean-François Pruneau, CFO at Transat]

Thank you, Annick. Good morning, everyone. Before reviewing our financial results, I would like to highlight improvements to our financial position in the second quarter. We diligently continued to deleverage our balance sheet by voluntarily paying off our high interest subordinated debt of CAD 36 million in the quarter, which will allow us to save CAD 5 million of interest costs annually. Of note, this latest payment flowed from our operations, not from a land sale or external sources. As Annick mentioned earlier, total loan payments have amounted to CAD 110 million in the last three quarters, so we continue making progress in reducing our debt level. We have also extended our secured debt maturity from 2025 to 2026, providing Transat with added flexibility to secure a refinancing.

[Jean-François Pruneau, CFO at Transat]

In that respect, we are engaged in continued discussions with our main debt holder, the federal government. Our refinancing remains top priority. Now, let's turn to our second quarter results. Revenues in the second quarter of 2024 reached CAD 973 million, up 12% from the second quarter of 2023. The revenue growth reflects sustained demand for leisure travel, driven by a 12% increase in traffic and additional capacity of 13% year-over-year. However, growth was tempered by intense competition, challenges in revenue management stemming from the Pratt & Whitney engine issues, the negative impact on bookings of employee strike threats, and the economic slowdown, which all applied downward pressure on airline unit revenues. As a result, yield declined 7.5% year-over-year.

[Jean-François Pruneau, CFO at Transat]

Net loss totaled CAD 54 million, or CAD 1.40 per share in the second quarter of 2024, compared to a loss of CAD 29 million, or CAD 0.76 per share for the same period in 2023. Meanwhile, adjusted EBITDA amounted to CAD 38 million in the second quarter of 2024, compared to CAD 56 million in the second quarter of last year. The variation is mainly due to the fall in airline unit revenues and to higher operating expense associated with capacity expansion and expenses caused by the Pratt & Whitney engine issue, including additional temporary aircraft lease during the quarter to replace grounded aircraft. These factors were partially offset by lower fuel expenses, reflecting a price decline of 11% year-over-year. It should be noted that we are still in negotiations with Pratt & Whitney to obtain compensation for grounded aircraft.

[Jean-François Pruneau, CFO at Transat]

To date, load factors for this summer are 2.1 percentage points lower than in 2023, and yields are 8% lower than last year. Moving to cash flows and financial position, cash flow from operating activities amounted to CAD 183 million in the second quarter of 2024, compared to a hundred and ninety-one million in the second quarter of 2023. The slight decrease can mainly be explained by lower operating income this year and to a decline in net change in the provision for return conditions. These factors were partially offset by higher liquidity generated by net change in non-cash working capital balances, as well as in other assets and liabilities.

[Jean-François Pruneau, CFO at Transat]

After accounting for investing activities and repayment of lease liabilities, free cash flows reached CAD 110 million in the second quarter of 2024 versus CAD 154 million in the same period last year. In terms of our balance sheet, cash and cash equivalents stood at CAD 529 million at the end of the second quarter of this year, up from CAD 453 million at the end of Q1 2024. Following the debt repayment that I referred to earlier, Transat's long-term debt and deferred government grant stood at CAD 781 million at the end of the second quarter, compared to CAD 806 million at the end of the previous quarter. Consequently, we strengthened our cash position and reduced our long-term debt in the second quarter of 2024.

[Jean-François Pruneau, CFO at Transat]

Finally, long-term debt and deferred government grants, net of cash and cash equivalents, declined to CAD 252 million as of April 30, 2024, down CAD 100 million from the end of Q1 2024. So this concludes our prepared comments. We are now ready to take questions.

[Operator]

Thank you, sir. We will now take questions from the analysts. If you are an analyst and would like to register for a question, you will need to please press star followed by one on your touchtone phone, and if you would like to withdraw from the question queue, you will need to please press star followed by two. [Foreign language]. You may now press star one if you have any questions. And your first question is from Konark Gupta at Scotiabank. Please go ahead.

[Konark Gupta, Equity Research Analyst at Scotiabank]

Thanks, operator. Good morning. My first question is on the capacity, and you went down from 19% growth to 13% recently, and then now 11%. Just curious if this incremental capacity cut is all driven by you know the union noise that we are hearing, and then the Pratt & Whitney continued issues there? Or is there something else in these cuts?

[Annick Guérard, President and CEO at Transat]

Well, it's not only the impact of the union, but it's also the impact of changing program that we had to make due to Pratt & Whitney issues. So we had to revise some downward capacity on the routes. We had to cut some routes. Some of the aircraft that were supposed to be delayed earlier as well, the A321LRs, so because of the delay, we had to get to cut on capacity. So it's a mix of different factors. The union, Pratt & Whitney, and late deliveries in our aircraft as well.

[Konark Gupta, Equity Research Analyst at Scotiabank]

Okay, now that makes sense. And is there any specific area or region where you had to cut more capacity because of these issues?

[Annick Guérard, President and CEO at Transat]

I would say mostly on the U.S. western U.S., so destinations like San Francisco, Los Angeles. Of course, we cut as well on domestic, but that was planned. That was part of the plan. We had to reduce some frequencies on the European program because we don't have necessarily the right aircraft to be operating on specific routes. So that, that's about it.

[Konark Gupta, Equity Research Analyst at Scotiabank]

Okay, that's very helpful. Thank you. And then, last one for me before I turn over. You know, Jean-François, so if we can, dig into the debt side of things. You repaid some over the last three quarters, which is pretty good, I guess, but you still probably have a few more kind of, you know, things to kind of take care of in the next, few quarters. Can you help us understand what opportunity do you see now on the debt side to delever the balance sheet further and, and this, you know, this new sort of interest rate, cut environment that we are starting to see now, finally, and does it help you?

[Jean-François Pruneau, CFO at Transat]

Yeah, of course, it helps. Some of the debt is on a flowing rate basis. Obviously, if, you know, the rate cut's gonna help on the interest expense. That being said, there's no magic. You know, free cash flow generation is the magic, so we definitely have to generate you know, positive free cash flow to be able to reduce our debt level. That being said, as I mentioned in my prepared comments, you know, we are in ongoing discussions with our main creditor, you know, the government. And we're still you know, we're still confident that we are able to execute on our refinancing plan that's gonna be helpful for the company.

[Konark Gupta, Equity Research Analyst at Scotiabank]

That's great. Thanks, guys.

[Jean-François Pruneau, CFO at Transat]

Thank you.

[Operator]

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

[Cameron Doerksen, Senior Equity Analyst at National Bank Financial]

Thanks very much. Good morning. Question on the Porter JV, which, you know, is now good to see that it's approved and underway. But, you know, you sort of characterize it, I guess, as the first phase of the joint venture. Can you talk about what additional phases there will be with this relationship?

[Annick Guérard, President and CEO at Transat]

Yeah. So the first phase was to increase our capability to connect the North American network of Porter with our European network. So that's the first phase. So making sure that we align schedule, making sure that we align pricing as well, and that we coordinate the commercial efforts at both sides. What was announced as well yesterday is that both carriers are now able to commercialize each one's full network. So that's good news as well. In terms of phase two, what we're looking at is approaching the U.S. market on routes that we have in common, so especially on Florida, so we're gonna have to work on that. So phase two is gonna come more in fall, and phase three is looking at how we will work together on south destinations.

[Annick Guérard, President and CEO at Transat]

That's gonna be in 2025 as well. As we have previously mentioned, we will be doing the tour operator business for Porter. Porter will deploy capacity in south destinations. So we will see, we will have to work to make sure we coordinate our efforts effectively on the south market. So these are the three phases. So by the end of 2025, we should have pretty much everything in line. Adding as well some alignment on loyalty. So Porter will be able to burn their points. Customers of Porter will be able to burn their points on our network, and eventually we will be able to do so as well, once we have our loyalty program launch next year.

[Cameron Doerksen, Senior Equity Analyst at National Bank Financial]

Okay, no, that, that's great detail. Just second question for me, on the salaries and benefits costs, they were up, you know, quite a bit, year-over-year, 30.5%, but also a pretty big sequential increase as well from, from Q1. So I'm just wondering if there's anything unusual going on, on there?

[Jean-François Pruneau, CFO at Transat]

Yes. Well, you know, obviously, salaries reflect, you know, added capacity. So, you know, we're hiring based on the capacity I want to deploy. So it's obviously on a year-over-year basis, explain, you know, most of it. But it's true, we had a one-time cost in our salaries that boosted the expense in Q2, was a CAD 5 million one-time cost.

[Cameron Doerksen, Senior Equity Analyst at National Bank Financial]

Okay. And bringing some of the airport operations in Montreal in-house, does that affect the, you know, I guess, the headcount and will also affect that line item?

[Jean-François Pruneau, CFO at Transat]

Absolutely. Yeah, it's true. I should have mentioned it, but it's true. The fact that we internalize our ground handling operations, ramp operations in Montréal, we added employees, obviously, to our payroll.

[Cameron Doerksen, Senior Equity Analyst at National Bank Financial]

Okay, okay. That, that's very helpful. Thanks very much.

[Jean-François Pruneau, CFO at Transat]

Thank you.

[Operator]

As a reminder, ladies and gentlemen, please press star one if you have any questions.

[Operator]

[Foreign language]

[Operator]

[Foreign language]

[Operator]

The next question will be from Tim James at TD Cowen. Please go ahead.

[Tim James, Senior Equity Analyst at TD Cowen]

Thank you. Good morning. Just wondering if you could talk a bit about what you're seeing. You've called it competitive pressure. Could you just talk about kind of regionally, where you see that being the most significant or maybe, I guess, in reference to your various hubs across the country, if there's any particular regions where that's more significant than other locations?

[Annick Guérard, President and CEO at Transat]

I would say that it's really across all programs, all destinations. I think that, when we're looking at the overall capacity, of course, on one side, we are seeing sustained demand for travel. But I think we, we all believe, I, I would say the market all believe that last year's urge for travel would persist this year in the same way, and obviously, capacity was deployed with that assumption. You know, what we see, we, we still see a lot of uncertainty in the market, from an economic standpoint. Canadians continue to feel the negative impacts of high inflation, high interest rates on their budget. We see even, some, postponing their spending.

[Annick Guérard, President and CEO at Transat]

Overall result is that there is significant increase in capacity, but all of this has put a lot of pressure on yield because the demand is there, but it's not at a growth rate that is as strong as last year.

[Tim James, Senior Equity Analyst at TD Cowen]

Okay. Then on the same topic, the 7.5% decline in yield, is that a pretty good indication of the year-over-year change in fares or packages? Or is there anything in terms of mix and route additions that would be influencing that, as well? I'm just trying to disaggregate between maybe what's just really year-over-year changes in the price that the customers are facing versus any other influences that drive that yield number.

[Annick Guérard, President and CEO at Transat]

No, it's really, yields are tracking below last year. It's really, it's not a question of mix. It's, it's really, year-over-year, what we're seeing compared to last year. Understanding that, last year was exceptionally strong as... So, so the comparison is a little bit difficult to do, and, we need to bear in mind as well, that, we're still ahead of pre-pandemic levels. So, the comparisons with 2023 is, a little bit, difficult.

[Tim James, Senior Equity Analyst at TD Cowen]

Okay. My last question, have any changes in Porter's capacity plans been a contributing factor to your changing sort of capacity plans or your, you know, financial guidance for this year? I'm just wondering if that, you know, your assumptions that have been put into your business plan regarding the timing of Porter and how it would ramp up have changed at all, or if it's kind of tracking to your original assumption?

[Annick Guérard, President and CEO at Transat]

No, not for 2024. We are very well aligned on our growth plan. Of course, we know their plan, we know their expansion. They're expanding quickly in North America, domestic and transborder. And as we expand on our side, we are working at coordinating that capacity together and making sure that we create as much value as possible. So but there haven't been any changes, significant changes, in Porter plans that had an impact on us. Thank you very much. And that's important.

[Operator]

Thank you. Next question will be from Michael Kypreos at Desjardins Capital Markets. Please go ahead.

[Michael Kypreos, Equity Research Associate at Desjardins Capital Markets]

Yes, good morning, and thank you for taking my question. Maybe on CapEx. For the first six months of the year, you spent around CAD 79 million on CapEx, primarily for ACAB aircraft maintenance. It's a pretty nice step up versus last year. Could you maybe just give us an update on your expectations for CapEx, free cash flow generation for the balance of the year? And if there are any plans to kind of scale down some of this, given the lower expected profitability?

[Jean-François Pruneau, CFO at Transat]

Sure. Well, in terms of, in terms of the maintenance calendar, obviously, like I think we said in the past, you know, due to the pandemic, our calendar is unfavorable this year. So it's obviously had an impact. On top of that, we have increased capacity and more airplanes or more aircraft in our fleet, so it also will have an impact on maintenance, on the CapEx related to maintenance. And the fact that we internalize our ground operations at the Montréal Airport. You know, we obviously had to spend more on capital expenditures. And in fact, for the first two quarters of the year, and it's almost over now, and we still have some few things to do, but it's, I would say it's pretty minor.

[Jean-François Pruneau, CFO at Transat]

But total for this, the first semester or the first two quarters of the year is a total of CAD 10 million related to the investment for ground handling operations in Montréal. So that's, that should be almost over. In terms of next year, you know, obviously, it has to reflect the fleet. We might have some, you know, some reduced needed for, for maintenance related to, you know, our current calendar, but I wouldn't expect that to be material.

[Michael Kypreos, Equity Research Associate at Desjardins Capital Markets]

Thank you. I appreciate it.

[Jean-François Pruneau, CFO at Transat]

Thank you.

[Operator]

Thank you. At this time, we have no other questions registered. Please proceed.

[Annick Guérard, President and CEO at Transat]

Thank you, everyone. Before we close the line, let me remind you that our third quarter results will be released on September 12th. Thank you, and have a great day.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending.

Participants

Analysts

• Andréan Gagné, Senior Director of Communications and Corporate Affairs at Transat
• Annick Guérard, President and CEO at Transat
• Cameron Doerksen, Senior Equity Analyst at National Bank Financial
• Jean-François Pruneau, CFO at Transat
• Konark Gupta, Equity Research Analyst at Scotiabank
• Michael Kypreos, Equity Research Associate at Desjardins Capital Markets
• Tim James, Senior Equity Analyst at TD Cowen