BUSINESS

Transat increases temporary layoffs amid capacity cuts to improve profits

09/13/2012 10:12 EDT | Updated 11/13/2012 05:12 EST
MONTREAL - Transat AT is set to temporarily lay off more than twice the number of pilots and flight attendants it did last year as the travel company continues to cut capacity amid its drive to restore profits.

The parent of Air Transat and numerous travel-related businesses said Thursday it will lay off about 50 of its 400 pilots and 550 of 1,800 flight attendants in the coming weeks until business picks up in November.

Last year, it laid off 17 pilots and 250 flight attendants.

"It's not something new, it's not something that's happened for the first time," CEO Jean-Marc Eustache said during a conference call about Transat's stronger-than-expected third-quarter results.

Transat lays off workers each year at this time of the year as it parks larger wide-body planes used in the summer to serve the transatlantic market. Those planes require more crews in part because of layovers than smaller aircraft used for sun destinations.

But Transat is laying off more employees this year because it is cutting the number of seats it sells as it tries to boost margins by flying fuller planes with customers paying higher fares.

Transatlantic capacity is being cut about 10 per cent this fall while capacity to sun destinations from Canada is down 17 per cent. It also plans to reduce the number of seats by seven per cent during the busy winter season.

Five planes with pilots are also being transferred for two months to Garuda Airlines to fly thousands of Indonesian pilgrims to perform the hajj in Mecca. Four planes were sub-leased last year, three in 2010.

Eustache said Transat had to stem months of losses.

"We're still not finished, we still have work to do, we are going to continue to do what have to do ... (so) we don't continue to have losses," he told analysts.

Transat shares surged after the company handsomely beat expectations by posting its first profit in more than a year despite challenges in the European market.

The Montreal-based company earned $9.4 million or 25 cents per diluted share in its third quarter compared with a loss of $2.8 million or seven cents per share a year ago.

Transat's B shares (TSX:TRZ.B) gained more than 23 per cent, rising 92 cents at $4.91 in afternoon trading on the Toronto Stock Exchange.

Transat's adjusted after-tax income improved to $10.5 million or 28 cents from $2.8 million or seven cents per share in the year-earlier period.

Revenue was down, however, falling three per cent from a year earlier to $909.1 million from $937 million due to planned capacity reductions.

Analysts had expected an eight cents per share loss on $922 million of revenues.

Eustache said he's confident the changes will improve the company's bottom line but noted the first quarter always ends up in a loss.

"We don't expect that the first quarter will not be a loss against this year," he said, adding that improvement in other quarters is key.

Transat said transatlantic travel was satisfactory during the quarter, which spanned the months of May, June and July that mark the start of the summer vacation travelling season.

North American business units earned $11.1 million compared with an operating loss of $15.8 million last year as average selling prices and load factors increased. Revenues dropped $15.6 million due a lower number of travellers following reduced capacity on the transatlantic market and sun destinations.

European operations earned $11 million, down from $30.5 million in 2011. The decrease is partially attributable to the expiration of Transat's contract with Thomas Cook Airways and intense competition in France, where market conditions remain very difficult, especially to North Africa.

Revenues decreased by $12.3 million due to a lower number of travellers and the currency exchange.

The company said the outlook for the current fourth quarter from August through October has showed improved business conditions, although the situation remains demanding.

Analyst David Tyerman of Canaccord Genuity said the much stronger results were "a nice surprise" but he remains cautious about the company due to volatile results in recent years.

"We remain cautious about the outlook, as Transat results have whipsawed between significant upside and downside surprises, largely due to competition factors over which Transat has limited or no control," he wrote in a report.

While the company's profit improvement efforts should help, Tyerman expects competition will continue to be the main driver of the company’s outlook.