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Transat flying high despite competitor’s entry

Transat has a deep-pocketed new threat to watch out for: Air Canada’s low-cost carrier Rouge.

Chris Young/THE CANADIAN PRESS

Jean-Marc Eustache isn't seeing red yet.

The president and chief executive officer of tour operator Transat A.T. Inc. has a deep-pocketed new threat to watch out for: Air Canada's low-cost carrier, Rouge.

So far, though, Rouge's arrival doesn't appear to have done much damage to Montreal-based Transat's performance. The summer of 2013 looks to have been an excellent one for Transat as travellers booked trips to key European destinations in large numbers while the company kept a lid on capacity and benefited from higher prices.

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Mr. Eustache is expected to provide details of how the summer shaped up when Transat reports third-quarter results Thursday.

Rouge hasn't been a big factor, says analyst Ben Vendittelli of Laurentian Bank Securities.

"Air Canada Rouge does not seem to be affecting pricing thus far and does not appear to be a price leader in the market," he said in a recent research note.

"Furthermore, Rouge's cost structure is likely significantly more than that of Transat, given the aircraft type, while we continue to see Rouge as a transfer of capacity [from Air Canada 's main airline] in order to ameliorate margins and not a market share move."

Added National Bank Financial analyst Cameron Doerksen in a recent research note: "We still see Rouge as a threat to Transat, but its impact this summer will be negligible and the cost reductions Transat is implementing should help offset competitive pressure the company might face next year from a larger Rouge."

Meanwhile, Transat – Canada's largest tour operator and one of North America's biggest vertically integrated international holiday travel outfits – is marketing more high-end, higher-margin travel packages that include luxury hotels.

Mr. Vendittelli said management has received encouraging feedback from its "distinction and luxury" services.

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"If Transat is successful in shifting more of its business to differentiated products, we believe this will reduce the commoditization of its package tours," Mr. Doerksen said.

Mr. Vendittelli has an earnings-per-share estimate of 38 cents, while Mr. Doerksen is looking for 48 cents, up from an earlier forecast of 35 cents. The consensus expectation is 39 cents.

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