Transat A.T. Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 12, 2024

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Transat Conference Call. Note that this call is being recorded. I would now like to turn the meeting over to Andrea Guignet, Senior Director, Communications, Public Affairs and Corporate Responsibility. Please go ahead.

Speaker 1

Thank you, Sylvie. Hello, everyone, and thank you for joining us for our Q3 earnings call ended July 31, 2024. I'm here this morning with Annick Guerard, President and CEO and Jean Francois Bruneau, our Chief Financial Officer. Anne Nicolas will provide an overview of the quarter and comment on the current operational situation and commercial plans for the future. Jean Francois will then discuss our financial results in more detail.

Speaker 1

We will then take questions from financial analysts. Questions from journalists will be taken offline after the call. The conference call will be conducted in English, but questions may be asked in French or English. As usual, our supplementary disclosure has been updated and is available on our website in the Investors section. Jean Francois may refer to it when he presents the results.

Speaker 1

Our comments and discussion today may include forward information regarding Transat's outlook, objectives and strategy that are based on assumptions and subject to risks and uncertainties. Forward looking statements represent Transat's expectations as of September 12, 2024 and are therefore subject to change after that date. Our actual results may differ materially from any stated expectation. Please refer to our forward looking statement in Transat's 3rd quarter news release available on tranzat.com and on SEDAR Plus. With that, I would like to turn the call over to Annick for opening remarks.

Speaker 2

Good morning, everyone. Thank you for joining us for our fiscal 2024 Q3 conference call. As you will see in our remarks today, Transit's quarterly results reflect a challenging market environment, mainly characterized by oversupply, which continues to put strong pressure on earnings. Jean Francois will cover financial metrics following my remarks. If we look at operating metrics, Transat reported customer traffic growth of nearly 3% in the Q3 and 10% for the 1st 9 months of the year, reflecting solid demand for leisure travel.

Speaker 2

Our load factor was 86.2%, down slightly from last year. Consumers remain willing to travel, but given the continuing economic uncertainty, we note they are more price conscious and look for discounts before booking. The industry also added significant capacity year over year, which intensified competition and put downward pressure on prices as it seeks to fill available seats. As a result, and taking into account the inefficiencies from the Pratt and Whitney engine problem, which impact not only our costs, but also our ability to maximize revenue, our yield decreased by 9.7% compared to the same quarter last year. Looking at our fleet, 5 aircraft were grounded in the 3rd quarter due to the Pratt and Whitney engine problem compared to 3 in the first half of the year.

Speaker 2

We now currently have 6 aircraft grounded and expect this number to remain stable throughout fiscal 2025, an improvement from our previous estimate of 8. This projection of grounded aircraft less negative than previous ones will enable us to better consolidate our operations for 2025. During the quarter, we took delivery of 7 additional aircraft including 4 A321LRs to support network and frequency expansion and 3 A330s on permanent fleet to mitigate the impact of grounded aircraft. Unfortunately, we are not able to fully utilize our renewed fleet. However, once all A321 LRs are operational, we expect significant efficiency gains and improved flexibility, fleet management and utilization.

Speaker 2

During the quarter, we launched the first phase of our joint venture with Porter Airlines, connecting Porter's North American network with Transat's overseas network. This includes aligning schedule, pricing and coordinating commercial efforts on both sides. So far, the number of connecting passengers through the joint venture has doubled compared to the same period last year when we relied solely on the codeshare agreement. It's still early days, but we are pleased with the progress to date. During the Q3, we also recorded a significant increase in our on time performance compared to last year.

Speaker 2

This improvement is due in part to the in sourcing of passenger and ramp services at Montreal, Trudeau Airport, which allowed us to better control our operation. In addition, our customer satisfaction score increased by 8 percentage points year over year to reach some of the highest levels in our history. This remarkable improvement reflects the tireless efforts of our team and I'm deeply grateful for their dedication to maintaining exceptional customer service. Having said that, we are clearly not satisfied with our year to date financial performance, which Jean Francois will discuss in a moment. While some challenges are common to all industry players, others are specific to TransX.

Speaker 2

To address these challenges and accelerate our corporate strategy, we've partnered since June with a leading consulting firm renowned for its industry expertise to develop and implement a comprehensive plan that will drive long term profitable growth. Over the summer, we launched the Elevation program, which involves a thorough review of our operations and business practices and targets key revenue and cost reduction initiatives that will enable us to improve financial results. To provide governance, accelerate execution and reinforce accountability, we have created the Elevation Management Office. The office brings together resources from the consulting firm with some of our senior team members to closely monitor all initiatives and ensure that benefits are maximized quick. Our target is to improve our annual adjusted EBITDA by $100,000,000 over the next 18 months.

Speaker 2

Among the initiatives we're implementing, we are focusing on key areas. First, we are enhancing our analytical capabilities through AI. We have identified areas where AI will significantly improve revenues and employee productivity. By partnering with experts who have successfully deployed similar solutions, we aim to unlock targeted opportunities and maximize their benefit. 2nd, we are working at reducing external spend by tightening our supplier management processes and renegotiating key contracts.

Speaker 2

3rd, we have identified clear opportunities to increase aircraft and crew utilization by better optimizing our network and scheduling. 4th, we will reduce operational costs through better inventory management and maintenance program review. We look forward to providing you with more details on this program in Q4 and with quarterly updates thereafter. With respect to the Pratt and Whitney engine issue, we have agreed to a financial compensation for grounded aircraft during the 2023 2024 period. Alongside this financial compensation, Pratt and Whitney will provide us with 2 additional spare engines, which we intend to monetize through a sell and leaseback transaction.

Speaker 2

Among other things, the additional spare engine will help mitigate the risk of increased aircraft grounding in the future. Looking ahead to Q4, booking velocity has remained comparable to last year, but we expect continued pressure on meals due to industry overcapacity. We continue to see a trend of consumers responding well to promotional fare. Our fleet will remain stable at 43 aircraft in 2025. Any capacity growth will come from the full year effect of route and frequency additions announced this year and from aircraft received in the Q3.

Speaker 2

In summary, consumer demand for leisure travel remains healthy despite a sluggish economic climate. However, profitability may remain under pressure over the next few quarters due to ongoing economic uncertainties and industry wide challenges. Transat is taking decisive action to improve its financial performance and we're confident the initiatives included in our Elevation program will deliver sustainable efficiency and profitability gain. In closing, I would like to thank our customers for their confidence in our ability to deliver a world class experience for their travel needs. Focusing on customer service is one of Transat's core values and our strong reputation has enabled us to consistently win top industry awards.

Speaker 2

Hazat was once again named the world's best leisure airline at the 2024 SkyTrax World Airline Awards earlier this summer. This award reflects the continued hard work and dedication of our teams and I would like to thank all of our employees for this important achievement. That concludes my remarks. Jean Francois will now present our financial results.

Speaker 3

Few highlights. First, it was a difficult year over year comparison due to record results in Q3 2023, driven by the benefits of re bench travel and lower fuel costs last year. 2nd, we have agreed to a financial compensation of US25 $1,000,000 from Pratt and Whitney, mainly in the form of credits for grounded aircraft during the 2023 2024 period. This compensation will mostly be accounted for in our Q4 results. Alongside the financial compensation, we will use our credits to purchase 2 additional spare engines, which we intend to monetize through a sell and leaseback transaction in the next few weeks.

Speaker 3

Minimal cash outflow will be required to purchase the said engines. In regard to our refinancing, it remains our top priority to complete our refinancing plan and strengthen our balance sheet. To that end, we are continuing our discussions with stakeholders and are reviewing a number of alternatives. Turning to our financial results. The 3rd quarter compares negatively to last year, which was an exceptionally strong quarter for TransAmp.

Speaker 3

Recall that a year ago, revenge travel had a favorable impact on yields, while we also benefited from significant tailwinds due to lower fuel prices. As a result, 3rd quarter sales decreased 1.4% to $736,000,000 The decrease in revenues reflects a 9.7% decline in yields, partially offset by a 2.8% increase in traffic. Furthermore, revenues were negatively impacted by intensified competition, industry wide overcapacity, inefficiencies resulting from the Pratt and Whitney engine issue impacting revenue management and the economic uncertainty, which applied downward pressure on yields. Net loss totaled $40,000,000 or $1.03 per share in the Q3 of 2024 compared to net income of $57,000,000 or $1.49 per share for the same period in 2023. Meanwhile, adjusted EBITDA amounted to $41,000,000 in Q3, 2024 compared to $115,000,000 last year.

Speaker 3

The downward pressure on adjusted EBITDA is mainly attributable to softer yields, higher fuel expenses as they rose by 15% during the quarter, driven by a 6% increase in fuel prices and higher fuel consumption tied to increased capacity. Higher maintenance expenses and costs related to our engines issues also impacted adjusted EBITDA. Salaries also increased to reflect the in sourcing of passenger and ramp services at Montreal Trudeau. But as Anik mentioned, this initiative not only improved on time performance, but also enhanced the quality of service for customers and at term will drive higher profitability. Moving to cash flow and financial position.

Speaker 3

Cash flow used in operating activities amounted to $93,000,000 in the Q3 of 2024 compared to $7,500,000 last year. The negative variation reflects a decrease in operating income this year and lower liquidity generated by net change in non cash working capital balances as well as other assets and liabilities. This was partially offset by a higher net change in the provision for return conditions. After accounting for investing activities and repayment of lease liabilities, free cash flow were negative $169,000,000 in the Q3 of 2024 versus negative $52,000,000 last year. In terms of our balance sheet, cash and cash equivalents stood at $362,000,000 at the end of Q3, 2024 and cash and cash equivalent and trust or otherwise reserved stood at $306,000,000 Transat's long term debt and deferred government grants totaled $792,000,000 at the end of the 3rd quarter compared to $781,000,000 at the end of the previous quarter.

Speaker 3

Net of cash and cash equivalents, the amount was $430,000,000 as of July 31, 2024. Finally, as discussed by Annick, we will provide additional information concerning the Elevation program with the release of our 4th quarter results in December. Looking forward, we are confident that the various initiatives from Elevation will gradually place Transat on the path to sustaining and improve financial performance. Now I'll turn the call to Anik for the conclusion.

Speaker 2

Thank you, Jean Francois. Let me conclude our remarks with a comment on the current situation at Air Canada. We read this morning that Air Canada is asking the federal government to force a settlement with its pilot by imposing funding arbitration. First, note that Transat was severely impacted earlier this year by multiple rounds of collective bargaining with our flight attendants without such recourse. The extension of such an extraordinary intervention to Air Canada would be an undeniable competitive advantage to the detriment of other Canadian airlines.

Speaker 2

The pandemic and border closures affected Transat more than any other Canadian airline given our international network. The emergency support we received from the federal government for which we are grateful has since placed us at a significant disadvantage to Air Canada. 100 of 1,000,000 of dollars of emergency repayable loans created an over leveraged balance sheet, mortgaging our ability to attract capital and invest to compete on a level playing field with Air Canada, which received a $500,000,000 equity investment without restrictive condition. We have been negotiating with the federal and Quebec governments for more than a year to restructure our pandemic debt without success. The time and urgency is now.

Speaker 2

It is time to restore healthy competition in Canada. We will now open the call for questions.

Operator

Thank And the first question, Premier Christian, is from Cameron Doerksen at National Bank Financial. Please go ahead.

Speaker 4

Thanks very much. Good morning. I just wanted to maybe have a couple of questions on the elevation program that you've outlined today. Obviously, dollars 100,000,000 EBITDA improvement is a pretty large number. I'm just sort of looking at some of the initiatives you've kind of outlined today.

Speaker 4

And frankly, it doesn't seem like some of these would be enough to kind of add up to $100,000,000 So I'm just wondering if there's anything else that you're kind of contemplating as part of this program that would get you to that kind of a level of operating income improvement.

Speaker 2

Yes. So as I discussed in my remarks, the decision to launch the Elevation program was driven by key factors. Our strategic priorities and operational focus have evolved in response to changing market condition and the competitive pressures impacting significantly the yields. We are facing as well specific challenges, including the ongoing Pratt and Whitney GDS engine issue, which has affected our operation disproportionately over the past year. And of course, it is expected that it will persist for the next 2 years.

Speaker 2

So we cannot stay there and do nothing given the recent performance, deception of this year. We had to launch something extremely powerful within the company to maximize Transat's value in the short term. So this summer, the whole team dedicated time to developing a robust plan, ensuring that the initiatives are very well designed, targeted and at the same time, align with the long term strategy. We have already begun implementing some of the initiatives in the past few weeks, And we're pretty much comfortable that we will attain our target of $100,000,000 There is full commitment and dedication. And at the same time, we're giving ourselves all the means and the resources that are required to deliver.

Speaker 2

So in terms of example of initiatives, as we said, we have identified areas. If we look at revenue, for instance, we have identified revenues within the organization where AI can enhance our revenue performance. We have, for instance, 3 main initiatives to optimize pricing, our fare class structure, our forecast accuracy, our overbooking structures. And we have been testing, doing some proof of concept over the last week, and we're extremely comfortable with the benefits that we're seeing so far. So the benefits are very high.

Speaker 2

We are allocating again the right resources to ensure we deliver the benefits very quickly. In terms of external spend, while it's pretty straightforward, we are rationalizing demand volumes. So we are negotiating better terms with suppliers. We have compared ourselves with benchmarks. We note that there's still a lot of room for improvement.

Speaker 2

And we need to review enhanced vendor performance and specification to drive further reductions in all external spend. So we have gone through in detail of all our spending and identified clear opportunities that will allow us to reach our target. In terms of productivity gains, it is clear for us that there are opportunities that are clear in the groups in some of the groups by using better tools. And we have started implementing those tools. So we are not talking about long term benefits, but short term benefits in the contact center, technical operation and crew management as well.

Speaker 2

We will not do this all by ourselves. We will have support from the external firm we've been working with experts that will be fully integrated within our team to make sure that this is the only thing we will be focusing on the upcoming months, upcoming year. As for network and scheduling optimization, we are addressing inefficiencies. We've broken down over the last month our flight schedules into details. And by tightening up the flight schedule, we're able to reduce the need for augmented crews, layover at destination and so on.

Speaker 2

So these are not when we target $100,000,000 this is not up in the air number. We're extremely confident with this number. We're even looking at upside that will come up with in the upcoming months. So the whole team is very well engaged, and we're very comfortable with what we're announcing today.

Speaker 4

Okay. That's great detail on that. Maybe just to follow-up, if I sort of obviously, this year is a difficult year from a margin perspective. But if I look out to a kind of maybe a more normalized market where you don't have these engine issues and demand is and pricing is stable and you've implemented these initiatives, what do you think the ultimate margin EBITDA margin transact could generate is in the future?

Speaker 3

Our target obviously is beyond double digits. So it's 10% plus.

Speaker 4

Okay. I will pass the line. Appreciate the color. Thanks very much.

Operator

Thank you. Next question is from Konark Gupta at Scotiabank. Please go ahead.

Speaker 3

Thanks and good morning. I wanted

Speaker 5

to ask you first maybe on the yield environment. Clearly, it got a little bit worse in Q3 than what you were seeing before. It seems like for the next coming quarter, the yield environment kind of remains here. Any changes you have noticed in here. Any changes you have noticed in yield environment recently in the last couple of weeks or so maybe for the coming quarter with respect to your overcapacity situations like seems like obviously some of the U.

Speaker 5

S. Airlines are saying this that the capacity is getting better. I'm not sure if that's the same thing in Canada. And then there's also maybe some sort of positive impact of Air Canada flight cancellations by people and maybe they're looking to book on transit or some other airlines. So any color there will be appreciated.

Speaker 5

Thanks.

Speaker 2

When we look at Q4, the yields and load factor, I would say, up to mid August, we're performing similar to Q3 when compared to 2023, but there has been significant improvement over the last weeks as we observed stronger demand for travel, especially in September October, especially on Europe. So our yields have gone up significantly, load factor has gone up significantly. So we have a lot of momentum at this point. So you were referring to aircraft strike threat. Potentially, this is having an effect.

Speaker 2

We see as well post Olympic effect on France, where a lot of people avoid traveling to France or Paris during mid July up to end of August. So we've seen an improvement on that side. That respond to answer your question, yes?

Speaker 5

Yes. Thank you. Yes, that's helpful. That's what I anticipated perhaps. Okay.

Speaker 5

And then with respect to your own capacity, so you guys again kind of trimmed some for the full year to 9.9% now. Any thoughts why the capacity reduction here? Like it seems like the Pratt and Whitney grounding is better than what you thought before. So what's driving this capacity cuts?

Speaker 2

Well, yes, we started at a much higher capacity at the beginning of the year and throughout the quarter as we announced we reduced the capacity. So the engine issues Pratt and Whitney led us to scale back because our forecast at the beginning of the year was better in terms of engine issues and then we were faced with we're at 6 right now, 6 aircraft that are grounded. And the last one was grounded 3 months before what we had expected. So we had to make adjustment again on that. So we had to made as we announced in Q3, significant frequency reduction on Europe across the program.

Speaker 2

We had to withdraw from Los Angeles and San Francisco as well. And the other thing is that when we talk about aircraft delivery, the aircraft delivery that we had during the month of May June were delayed. So we had to reduce capacity in June, a little bit in July as well. So all of that being taken into consideration had pushed us to adjust capacity.

Speaker 5

Okay. So obviously some of the grounding and some of the aircraft delivery challenges are kind of driving into that. That's great. Thanks. And then last one for me before I turn it over to balance sheet.

Speaker 5

So if you can provide any thoughts, I know it's too early maybe, but what are the options that you guys are exploring here? I guess, is balance sheet refinancing the only option here? Are there other sort of new innovative avenues? Any kind of potential discussion about shedding some part of the business or the full business? Any thoughts, what can be fixed and how it can be fixed here?

Speaker 3

That's a good question. Obviously, as Nick mentioned earlier, we've been in discussion with the federal government and the provincial government for the last year trying to resolve that over leveraged balance sheet. We need to strengthen the balance sheet. We know about that. So discussion has been ongoing.

Speaker 3

I would say that the last few weeks, we've been discussing with them on a more frequent basis. So I think that we have a good alternative for them. That being said, we're also looking at other ways to generate cash flow with the Pratt and Whitney resolution. We will acquire 2 engines, new engines at essentially no cash costs. And we will monetize that through a sell and leaseback.

Speaker 3

And on top of that, we also have 2 additional engines, used engines that are on the balance sheet that we will look to monetize as well through selling these back transactions. So there's a few options over there on a short term basis. But obviously, our discussions are with the governments are key.

Speaker 5

Okay. That's really helpful.

Speaker 3

Thank you so much and all the best. Thank you. Thank you.

Operator

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

Speaker 6

Yes, thanks. Good morning. I'm just wondering if there are any kind of particular routes or regions that you can point to where industry capacity and pricing pressure is particularly acute where it's most impactful?

Speaker 2

Well, it's been really across the board. I would say there was overcapacity deployed in the market. We talked about that since the beginning of the year. I think this is a statement that is shared across the industry. We're looking at big hubs, Toronto, Montreal, Paris,

Speaker 6

London.

Speaker 2

So it's been we can see across the board pressure on yields. There's no specific areas where we see more impacts. It's been across the network. Impacts. It's been across the network.

Speaker 6

Okay. My second question, just with regards to the Porter partnership and how that is working. Is there any kind of challenges or negative impacts from Porter's anything in their own capacity challenges that's having a negative impact on Transat? And then maybe just a general update on your work with Porter?

Speaker 2

No negative impact. We launched the first phase of the JV with Porter in June, and we're very pleased with the initial results. So far in the second half of fiscal year, the number of connecting passengers through the JV has doubled compared to the same period last year when we were solely relying at that time on the co chair agreement. So we have like we have up to 200 and more than 230,000 passenger segments today compared to half of that same time last year. Additionally, we launched since the launch, we have sold over 60,000 passenger segments on porters, stand alone flights.

Speaker 2

So we expect to start seeing significant benefits from the JV next winter with full potential realized within starting in 2026, I would say. Now we are really working closely in aligning our pricing, the schedule. So we're very much at the beginning, but what we've seen so far is very promising.

Speaker 6

Great. Thank you.

Operator

Thank you. Next question will be from Kevin Chiang at CIBC. Please go ahead.

Speaker 7

Hey, good morning, everyone. Thanks for taking my questions here. Maybe just I know we'll get more information on your Q4 call on this evolution program. Just wondering, is there any capital investments required as you embark on this restructuring or is it primarily kind of, I guess, OpEx spend and stuff like that?

Speaker 3

Yes. There are a few investments to be that we will have to make over the next few months, but nothing material compared to the benefits of the program.

Speaker 7

Okay. And I know this is going to be an unfair question here, especially as many of you weren't in your seats a decade ago. But about a decade ago, Transat did launch a strategic plan to also achieve $100,000,000 of incremental earnings. And if I were to kind of look over that timeframe, it's not like you had a 2014 earnings and then fast forward 3 years, you had $100,000,000 more. Earnings effectively were in some points lower.

Speaker 7

And I always got the feeling that while Transo was executing against a strategic plan at that point in time, those benefits were being competed away. As you got savings, your competitors got more aggressive potentially. Just I guess wondering as you think of this $100,000,000 just how confident you are that it's not coming through the system but gets competed away as you push through your own initiatives here?

Speaker 2

Yes. Well, we're always going to have competition and we will not be able to isolate the market environment, of course. And this is why in the 100 and 1,000,000 dollars target, we have put ourselves some cushion, I would say. So and the other thing maybe compared to 10 years ago is that we are looking at delivering results in a much shorter timeframe. With the structure that we've put in place, so we are working differently with the structure we're putting in place and having the Elevation Program Office and making sure that we are very well supported with external experts.

Speaker 2

We will ensure that we deliver those results as soon as possible. So that's different from, I would say, 10 years ago.

Speaker 7

Okay. No, that's fair. And I know we'll get more details in about a quarter's time. Maybe just last one for me and maybe just touching a little bit on the comments you made in your prepared remarks around Air Canada's ongoing pilot situation here and the press release or news release that came out this morning. I mean, your pilot agreement comes due in April of next year.

Speaker 7

And I think the rule of thumb we've typically used and correct me if I'm wrong is kind of 35%, maybe 40% of an airline's costs are related to the pilots. And I guess just given the public comments you just made, I guess how do you how would you think about absorbing the type of wage increases especially in year 1 that have been kind of bandied around both in the Air Canada negotiations as well as what you've seen south of the border. It just seems like it could be a pretty material kind of immediate cost headwind to you. Like if I said 35% of your $500,000,000 of salary costs were pilots and all of a sudden in year 1 of the new negotiation that could be up 20%, like that's not an insignificant cost impact given your current earnings run rate. Just I guess how do I square that potential outcome for you versus what I guess your comments this morning around Air Canada and their own negotiations?

Speaker 7

Like do you think it might be a risk that maybe a year from now that you're kind of facing your negotiations with Alba and obviously you could be seeing maybe more material increase in wage rates than you're currently anticipating?

Speaker 2

Yes. So maybe just to correct you on your number, the pilot salaries represent 5% of our overall costs.

Speaker 7

5% of your overall costs?

Speaker 1

Yes, yes.

Speaker 2

We've been preparing for this negotiation. What's really important is to have open communication channel with the pilots. We've always had strong relationship with the unions keeping a formal communication open, I would say. Of course, we expect impacts as it is across the industry and pressure and increasing overall wages. At the same time, we always need to take into account the full collective agreement.

Speaker 2

And the collective agreement is composed of yes, salaries, but as well other clauses on which we can play, we can make adjustment in terms of productivity gains and looking at different alternatives, I would say that this will come out as a win win deal. We are of course, the pilots are preparing on their side. We are preparing on their side, and we're pretty much confident that we're going to come up with a reasonable deal next year, understanding our history of negotiation and understanding as well the fee.

Speaker 7

That's good color. Can I just ask a point of clarification? When you say 5% of operating costs, does that include depreciation? Or would that be your kind of OpEx less depreciation? Or maybe it doesn't make too much of a difference?

Speaker 3

Yes, that would be OpEx, but also including services of destination.

Speaker 7

Right. Okay. Okay. That's helpful. And maybe sorry, just last one for me.

Speaker 7

Just as you think of this restructuring, you're going to go through, are there any is there anything we need to contemplate in terms of restrictions in your labor agreements that would that you would need to I guess a bridge you would need cross as you kind of pursue the $100,000,000 or many of these initiatives, you think the unions are generally agnostic to some of the levers you plan to pull here? Or they view it as a positive?

Speaker 2

No, no. We it's inside their current collective agreement.

Speaker 7

Okay. That's very helpful. Thank you very much and best of luck as you close out the fiscal year here.

Speaker 2

Thank you.

Operator

Your next question will be from Benoit Poirier at Desjardins. Please go ahead.

Speaker 8

Yes. Good morning, everyone. Thanks also for the great color around the Porter partnership. So any other potential co share agreements that you're looking at that could be incremental to the main one with Porter? And could you maybe give an update on the Fidelity program that you're looking to bring eventually?

Speaker 2

In Good morning. In terms of alliances, we are in discussion with other big players in the market. But discussions are still happening, so we are not able to comment on that at this point. But we will eventually in 2025 be able to provide more information. As for the loyalty program, significant progress has been made since we started building the process in January.

Speaker 2

We have achieved key milestones. We've completed business model, detailed the design of the program and we are in the process of identifying or deciding potential financial partners. We still plan to launch next mid-twenty 25. Of course, this will be it's a key initiative. This will be a driver of value creation for Transat and our clients.

Speaker 2

And it gives us the potential to have a strong impact on the future of Transat as we will be able to compete more strongly against other carriers who already had a program in place. So we're very excited about this program about this project. We've been working on that for more than a year with a lot of external experts and we're pretty confident that we will be able to deliver that new product in 2025.

Speaker 8

Okay. Thanks. That's great color. And if we look at the Canadian dollar, it has strengthened somewhat over the recent months. Fuel price came down.

Speaker 8

So how much of a tailwind or headwind, both factors can it be for the Q4 so far?

Speaker 3

Yes, absolutely. You're perfectly right, Benoit. Canadian dollars appreciated significantly more than we expected, to be honest. Same for fuel prices, inventories are up, prices are down and we don't see that going back up pretty soon. So it's definitely a tailwind for us.

Speaker 8

Okay, okay. That's great. And for fiscal year 2025, I know it's early, but what's your initial take about the capacity that will be that could be added for the industry next year, Annick?

Speaker 2

Yes. So when we look at demand, we expect consumer demand to remain somewhat uncertain in the context of high interest rates. So we are currently seeing ongoing pricing pressure extending into the winter season. There will be on our side in terms of capacity, I think the market is going to be much more disciplined than last year. On our side, there will be no additional aircraft added in 2025.

Speaker 2

We expect a small growth in capacity in winter, 3.7 percent and flat for summer for next summer in 2025. And the capacity increase in winter is mainly due to the addition of the 3 A330s that we've acquired to replace grounded A321 LRs. There won't be any ACMI contracts either. So 2025 for us will be much more stable than 2024 in terms of fleet movements and operation. And this will definitely have a positive effect on cost and customer satisfaction as well.

Speaker 2

We are more and more moving away from all the disruption that we had to go through early in 2024, while we suffer the impacts of the Pratt engines as we went along. So we are much better prepared for 2020 5. And when we look at and when we look at what the market is deploying in terms of capacity for 2025, I think we've learned from last year where we all injected too much capacity having been somewhat distracted or blinded by a year 2023 out of the ordinary. So we will be highly prudent and disciplined in capacity increases, not only in 2025, but in 2026 as well.

Speaker 8

Okay. That's great color. And maybe last one for me. You mentioned great color about the Elevation program, the €100,000,000 improvement in terms of EBITDA, but also the time frame over 18 months that could propel the margin in the double digit territory as you answered the first question. Now just in terms of timing, how much of the market environment needs to be supportive to get to the digit?

Speaker 8

Is it something that in 18 months you could achieve or you need a market environment that will be much more supportive to get there? I'm just curious to try to get more color about the double digit territory.

Speaker 3

Obviously, when you look at where we are right now, I don't think that over 18 months and with $100,000,000 more of EBITDA, we're going to get at that point to double digit margins. But I think that over time, that's the goal and that's what we're going to accomplish, that's for sure.

Speaker 8

Okay, perfect. Thank you very much for the time.

Operator

Thank you. At this time, there are no further questions. Please proceed.

Speaker 1

Thank you, everyone. Before we conclude, as a reminder, our 4th quarter results will be released on Thursday, December 12. Thank you every day. Thank you, everyone, and have a good day.

Operator

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Key Takeaways

  • Transat faced a challenging market environment with industry oversupply and price-conscious consumers causing a 9.7% year-over-year decline in yield.
  • The Pratt & Whitney engine issue grounded six aircraft—five in Q3—prompting a US$251 million compensation deal and the acquisition of two additional spare engines to mitigate future disruptions.
  • Transat launched the Elevation program aiming for a US$100 million improvement in annual adjusted EBITDA over 18 months by leveraging AI, optimizing network scheduling, and reducing external spend.
  • Operational performance improved with on-time metrics and customer satisfaction up 8 percentage points, while the new Porter Airlines joint venture doubled connecting passenger volumes year-over-year.
  • Financials remained under pressure as Q3 2024 delivered a net loss of $40 million and adjusted EBITDA of $41 million versus $115 million in the prior year, with free cash flow at negative $169 million.
AI Generated. May Contain Errors.
Earnings Conference Call
Transat A.T. Q3 2024
00:00 / 00:00