BUSINESS

Transat faces tough winter season with increased capacity from Air Canada Rouge

12/11/2014 10:28 EST | Updated 02/10/2015 05:59 EST
MONTREAL - Transat A.T. faces another tough winter season amid increasing competition, especially from Rouge, Air Canada's low-cost leisure carrier.

The industry is expected to boost the number of seats to sun destinations by more than 10 per cent, much like it did last summer on transatlantic routes.

Even though Transat is cutting its own capacity by six per cent, the Montreal-based leisure tour company said Thursday that it is somewhat insulated since it primarily sells packages with hotels and does not fly to some of the same southern markets as the Air Canada (TSX:AC) subsidiary.

"For us it's a game who'se got the best hotel at the best price for the right customer...it's not just a game of capacity," president and CEO Jean-Marc Eustache said Thursday after releasing the company's 2014 results.

Transat (TSX:TRZ.B) hopes to improve its bottom line this winter but said fuel price volatility and a weakening Canadian dollar have stopped it from forecasting a profit. It lost $33.6 million in the first two quarters of the year, after losing $37.9 million in the prior winter period.

Since launching in July 2013, Rouge has rapidly expanded its service to the U.S., the Caribbean, Mexico and Europe.

"This year, everybody expected that we were going down because of Air Canada Rouge," Eustache told analysts during a conference call. "What happened, it was the second best summer that we ever had."

Analyst David Tyerman of Canaccord Genuity says its difficult to think that increased capacity from Rouge, WestJet and other rivals isn't having some impact since heightened competition prevented Transat from raising fares to fully offset the impact of the weaker Canadian dollar last summer.

"It's hard to believe that Transat would be an island unto itself in a world of capacity (additions) in the broader sun destinations market," he said in an interview.

Tyerman added that Transat needs to improve its cost structure further before once again increasing capacity. A string of cost cutting efforts have increased margins by $55 million over three years, with another $20 million to be added in 2015.

Meanwhile, Transat signalled that its era of reducing capacity is about the end now that the airline has a fleet flexible enough to meet the different demands of flying to Europe as well as to sun destinations. The company plans to outline its strategy in March.

Transat beat analyst forecasts as the tour operator ended its 2014 financial year with its best summer season aside from 2013.

Net income decreased 44 per cent to $30.6 million in the fourth quarter largely due to the impact of fuel hedging contracts. Excluding that and restructuring charges, Transat's adjusted earnings were $49.4 million or $1.27 per diluted share, down from $54.8 million or $1.40 per share in the fourth quarter of 2013.

The company said it carried 5.4 per cent more travellers and received higher prices during the quarter but its profit was reduced by the Canadian dollar's decline against other currencies and increased capacity on transatlantic routes.

Revenue for the company's fiscal fourth quarter was $844.7 million, up 4.5 per cent from $808.6 million in the comparable period of 2013.

Transat's North American operations earned $55.5 million in adjusted operating income (EBITDA), down nearly 20 per cent from the prior year largely due to the substantial increase in competition on transatlantic routes, along with the impact of a lower loonie. Revenues increased by five per cent or $28.8 million.

The European segment's EBITDA increased to $17.4 million from $11.5 million a year earlier as revenues grew on a 15 per cent increase in the number of travellers, mainly in the medium-haul market.

Benoit Poirier of Desjardins Capital Markets said the quarterly adjusted profits were well above his estimate of 99 cents per share, primarily due to much higher number of travellers that boosted revenue.

For the full year, Transat's net income fell to $22.87 million or 59 cents per diluted share, from $57.95 million or $1.51 per share in 2013. Excluding one-time items, adjusted profits were off nearly 28 per cent to $45.24 million or $1.16 per share from $62.56 million or $1.63 per share in the prior year.

Revenues increased to $3.75 billion from $3.65 billion in 2013.

On the Toronto Stock Exchange, Transat's shares closed down eight cents to $9.09 on Thursday.

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