Air Transat faces headwinds from currency, competition

As tour operator Air Transat jets into the summer season, questions linger about the company's ability to fend off stiffer competition and offset the negative impact of the lower Canadian dollar.

Montreal-based Transat and other industry players have been struggling against currency headwinds. In its first quarter, Transat said the significant drop in the loonie's value in December and January amplified its losses and that this situation would likely continue through the rest of the winter season.

Canada's largest tour operator also said it expects second-quarter results – out Thursday – to be weaker than in the year-earlier period, even with a $35 currency surcharge on holiday packages.

Adding to the pressures on Transat are expansion onto its turf by Air Canada's new low-cost carrier Rouge.

Investors are looking for an encouraging summer season outlook from Transat chief executive Jean-Marc Eustache as well as an update on efforts to counter the currency effect and Rouge's growing presence.

"The focus when Transat reports [second-quarter earnings] will be on its summer guidance and with [Air Canada] increasing its transatlantic capacity," CIBC World Markets analyst Kevin Chiang said in a research note.

"With rouge still in the early stages of its rollout, we expect [Transat] to put together good summer results."

But he expressed concerns over Transat's ability to compete against growing competition from Canada's scheduled carriers.

"Despite Transat's move to increase flexibility within its cost structure (i.e., moving to a more seasonal fleet structure), it does not have the same levers to offset unforeseen headwinds similar to the scheduled carriers."

Canaccord Genuity's David Tyerman said he wants to know how much of a drag on financial results the currency issue continues to be in the summer season and what offsetting measures Transat is implementing besides the $35 surcharge.

"It is a big cost hit to Transat and all the other players," he said.

For the second quarter, Mr. Chiang forecasts earnings before interest, taxes, depreciation and amortization of negative $20.3-million, compared with positive $2.7-million a year ago.

He anticipates a per-share loss of 51 cents, compared with analysts' consensus of a loss of 35 cents.