To the grumbling Montrealers who have been digging their way out of snowbanks ever since a wave of Arctic cold blew in more than 30 centimetres of snow over the weekend, any suggestion this is a white blessing would raise a threatening band of people holding shovels high. But to Transat A.T. Inc., this bout of hard-core winter is a true windfall.
The country’s biggest tour operator could not have asked for a nicer gift with a week to go before Christmas. The tardy shoppers are scrambling to buy presents, and a sun vacation is never longed for as much as when the nostrils stick together in the piercing cold.
It is a rare bit of good luck for Transat, which has had its share of misfortune in recent years. Like a lot of travel-related companies, it was hit hard by the 9/11 terrorist attacks and the SARS epidemic. But Transat also had other miseries.
The Montreal-based company was burned with all the asset-backed commercial paper it bought on the advice of the National Bank of Canada. In 2007, when the redemption of those securities was frozen, close to half of its cash reserves were in ABCP. When Transat finally turned the page on its misadventure last spring, it had lost $30-million – which prompted its chairman, president and CEO, Jean-Marc Eustache, to advise, half-jokingly, but mostly seriously, to “Never trust your banker.”
Transat, which focuses heavily in the summer on travel to and from Europe (France in particular), was also knocked by the sovereign debt crisis that left many European economies reeling. Moreover, many of the vacation packages to North Africa it sold to Europeans had to be cancelled when the Arab Spring revolt broke out.
All that hardship is now fading as Transat has made an impressive comeback. After a record-breaking fourth quarter, the Montreal-based company just returned to profitability for the first time in three years, with a net income of $58-million on revenues of $3.6-billion for the year ended Oct. 31.
Even if it was overshadowed by Air Canada’s performance, Transat’s stock has jetted forward, almost tripling in value since its April 52-week low of $4.57. It closed at $13.39 on Tuesday.
While all airline and leisure stocks are flying high as travel has surged, Transat’s return rests on the turnaround plan it unveiled in late 2011, as the company was, as Mr. Eustache puts it, “crossing through the desert.”
The vertically integrated company that packages vacations using its own airline (Air Transat) reduced its capacity by scrapping less popular routes and destinations. It renegotiated its aircraft leases and restructured its fleet, whose composition and size shrinks and expands with the seasons. Transat also laid off workers and convinced its flight attendants to accept a three-year wage freeze. The company is now on its way to achieving, by 2015, the $75-million in recurring annual savings it targeted.
Despite all this work, however, Transat’s sustainability remains unsure. The same snow that sends Ontarians and Quebeckers south draws added capacity from Transat’s competitors, chief among which is Toronto-based Sunwing Vacations. The companies were neck and neck in the winter of 2013 for sun travel, both with a 29-per-cent market share, according to Transat estimates. And even as Transat returned to profitability in its last fiscal year, the tour operator still bled money last winter, for the fourth winter straight.
This season, Transat is adding a little capacity (3 per cent) while attempting to differentiate its products with extras in the hopes of convincing travellers to pay a little more for a small touch of lavishness. Prices are 5 per cent higher so far, but load factor is down 2 per cent compared to the same time last year.
In the commodity-like market of sun vacations, this is not an SPF burn-proof strategy. Transat expects Sunwing will boost its capacity by 9 per cent this winter. So any hopes the industry would show enough self-discipline to generate better profit margins is pretty much shot. Even passing along higher U.S. dollar costs through a $25 surcharge, a novelty in the ever-growing list of aviation ancillary charges, as Transat and Sunwing are contemplating, would be difficult if Air Canada and WestJet Vacations don’t go along.
Moreover, Air Canada’s leisure carrier Rouge, which launched this summer, is only now taking off and could spell trouble down the road for Transat, even if Mr. Eustache is dismissive. Rouge could take up to a quarter of Air Canada’s fleet as it inherits the main line’s older planes. And through labour agreements, Rouge’s cost per available seat mile, a widely used industry measure, will fall by 21 or 29 per cent, depending on the type of aircraft.
Weathering the winter is hard. But hey, let it snow, let it snow, let it snow.